The American Opportunity Tax Credit: Who Can Claim It and How?

The American Opportunity Tax Credit: who can claim it?

The American Opportunity Tax Credit (AOTC) aims to reimburse eligible education expenses spent during the first four years of postsecondary education. This credit works like any other credit, i.e., it either reduces the amount of tax you owe or increases the tax refund.

Unlike many other credits, the AOTC could reduce your taxes owed to zero, as well as provide you with a refund if the credit amount is more than the taxes owed. However, the credit is only partially refundable, i.e., taxpayers can get 40% (up to $1,000) of the remaining credit as a refund.

A student needs to meet the following requirements to qualify for the AOTC:

• Must be pursuing a degree or recognized education credential.
• Must be enrolled at least half time for a minimum of one academic period.
• First four years of higher education must not have been completed at the start of the tax year.
• They must not have claimed AOTC (formerly the Hope Credit) over the past four tax years.
• Students must not have a felony drug conviction.

Apart from the above requirements, families also need to meet the income threshold. For instance, the modified adjusted gross income (MAGI) for joint filers is $180,000, while for single filers (head of household, or qualifying surviving spouse) the income limit is $90,000. Taxpayers who are married but file separately are not eligible for the AOTC.

How to claim AOTC

Taxpayers who pay qualified higher education expenses for a qualified student, including you, your spouse, or a dependent, can claim the American Opportunity Tax Credit. It must be noted that if a taxpayer claims AOTC for a dependent child, then the child isn’t allowed to claim the credit themselves.

To claim the AOTC, you need to fill out Form 8863 and attach it to your tax return for the year. In Form 8863, you will have to give the educational institution’s employer identification number (EIN). The EIN is available on Form 1098-T, the tuition statement the educational institution sends to taxpayers.

If your AOTC claim wasn’t approved in the previous tax year, you may have to file Form 8862 before claiming the credit in the following years.

Following are the eligible education expenses for the purpose of AOTC: Tuition, Required enrollment fees, and Course materials the student needs for a course. The maximum available credit is $2,500 per eligible student, including 100% credit for qualified education expenses up to $2,000 and 25% credit for the next $2,000 qualified education expenses.