American Opportunity Credit: Definition & Overview
Individuals and businesses across the United States are eligible for all sorts of different tax credits. These tax credits are meant to provide a little more flexibility and forgiveness for the taxes you need to pay. Essentially, they’re a great way to pay less but also promote various initiatives.
The Hope Credit, which was available from 1998 to 2008 for eligible students for the first 2 years of higher education, was expanded and renamed the American opportunity tax credit (AOTC) in 2009. The Hope Credit was a credit of up to $1,500 for eligible students for the first 2 years of college.
The American opportunity tax credit is a type of an education tax credit available to certain American citizens. Want to find out more about how it works and if you’re eligible for it? Keep reading to learn more!
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KEY TAKEAWAYS
- A $2,500 income tax credit is available to qualifying students who have not yet completed four years of education.
- This credit is an education tax credit that may be partially refundable.
- Taxpayers must meet certain eligibility criteria, such as the household income thresholds and the student’s enrollment status, in order to be eligible.
What Is the American Opportunity Tax Credit?
The American opportunity credit is an education tax credit, part of which may be refundable, available to qualified Americans. This tax credit is available to eligible students who:
- Have not yet finished four years of post-secondary education
- Are enrolled in a program that leads to a degree or a certificate
- Are attending school on at least a part-time basis
- Do not have a felony drug conviction.
To promote higher education and offer some form of tuition compensation for parents or students who are paying for college tuition and fees, the American opportunity and the Lifetime Learning credits were passed into law.
The tax credit reduces the amount of income tax you have to pay, unlike a deduction, which reduces the amount of taxable income. You may claim either a credit or a deduction for the same expense, but not both. You may be able to claim a credit of up to $2,500 for adjusted qualified education expenses paid for each eligible student.
How the AOTC Works
One of two education credits offered to taxpayers is the American Opportunity Tax Credit. Recipients are eligible to use the AOTC for books, tuition, and other qualified education expenditures. However, expenses such as accommodations, healthcare costs, and insurance are not eligible for credit.
Unlike the AOTC, which is only available for the first 4 years of post secondary education, the nonrefundable Lifetime Learning Credit is available for an unlimited number of tax years for all years of higher education and courses to acquire or improve job skills.
A portion of the AOTC became refundable when the Hope Credit was expanded and renamed the American Opportunity Tax Credit. This means that if the credit reduces the taxpayer’s tax liability to zero, they are entitled to a 40% return of the balance of the credit, up to a maximum of $1,000.
How Do You Qualify for the AOTC?
The American Opportunity Tax Credit is available to a wider variety of taxpayers due to an expanded eligibility. The credit is subject to a phaseout based on income levels: Individuals having a modified adjusted gross income (MAGI) of $80,000 or less are eligible for the full amount of credit. For joint filers, this is increased to $160,000 or less.
If a student has been enrolled at least part-time in a recognized post-secondary institution for one academic year, the Internal Revenue Service considers them to be qualified. The student must not have been convicted of any felony drug charge by the conclusion of the tax year and must still be enrolled at the institution at the start of the tax year, taking courses toward a degree or another recognized educational qualification.
How Do I Claim the AOTC?
You must file a federal tax return, fill out Form 8863, and then attach the form to your Form 1040 or Form 1040A in order to claim the AOTC.
You can use the details from the Form 1098-T Tuition Statement that was received from the school the student attended. The form contains information about:
- The institution’s federal identification number
- The student’s taxpayer identification number
- Any payments made for tuition and related fees
- The amounts billed or refunded
- The scholarships the institution administers
- The student’s enrollment and graduation status
Summary
The American Opportunity Tax Credit, (formerly known as the Hope Credit), is a tax credit that can be used to offset the cost of the first 4 years of post-secondary education. Each eligible student may receive a maximum annual credit of $2,500, and if no taxes are due, 40%, or $1,000, may be reimbursed.
Limitations based on income apply to this credit.
FAQs About American Opportunity Tax Credit
The American Opportunity Credit expanded and replaced the Hope Credit in 2009.
You can see how much you have previously claimed for this credit at the bottom of Form 8863, Page 2.
Each eligible student may claim the American Opportunity Education Credit for the first 4 years post secondary education.
Any person who pays for qualified educational costs of the eligible student, who is either themselves, their spouse, or dependent, is eligible to claim the credit.
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