What is the American Opportunity Tax Credit?

by Kim Pinnelli

Updated September 14, 2020

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This Tax Credit directly lowers your tax liability when you pay for an eligible student’s college education.

College students and their parents face a huge financial responsibility when paying for college. The IRS offers some assistance with the American Opportunity Tax Credit. This credit directly affects (lowers) your tax debt rather than lowering your taxable income as a tax deduction would do.

Who is Eligible for the American Opportunity Tax Credit?

Eligibility for the American Opportunity Tax Credit is simple:

You must also have received Form 1098-T, Tuition Statement from the post-secondary school. You should receive this form by January 31 for the tax year. This form contains the information needed to file your claim. While not all expenses are applicable, you’ll have a thorough understanding of what you paid and what you can deduct.

How do you Qualify for It?

Any fees you pay toward tuition or fees qualify for the American Opportunity Tax Credit, including books and supplies. You don’t have to attend a four-year university – as long as the school participates in the Department of Education’s financial aid program, it qualifies for the credit.

You can even take the credit if you pay for your school fees with educational loans. You cannot take the credit if you receive scholarships or other tax-free assistance. The credit may not be used for room and board.

How Much Can You Claim?

The American Opportunity Tax Credit is equal to 100% of the first $2,000 in eligible expenses paid. If you have expenses beyond $2,000 (who doesn’t), you can take a credit for 25% of those expenses up to $2,500 per year.

You may only take the tax credit one time per eligible student. But if you have more than one eligible student, you can claim it for each student.

Up to 40% of the credit is refundable. This means even if you don’t owe taxes, you can receive up to 40% or a max of $1,000 of your credit back as a tax refund.

How to Claim the American Opportunity Tax Credit

First, you must decide who is claiming the tax credit. For example, if you claim the student as your dependent, you can claim it. You’ll file IRS Form 8863 to claim the credit. If you are a high-income earner, the credit may phase-out for you. The phase-out starts at $80,000 for single filers and $160,000 for married filing joint filers. If a single filer makes more than $90,000 or a married filing joint couple makes more than $180,000, they are ineligible for the credit.

If you pay for post-secondary education, it’s worth determining if you qualify for the American Opportunity Tax Credit. Remember, it’s a dollar-for-dollar credit rather than a deduction of your taxable income, which helps you save more money on your tax liability.

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