American Opportunity tax credit for qualified tuition and related higher education expenses

By | February 1, 2014

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit is a very useful credit for taxpayers encountering expenses for the first four years of an after-high school education. The American Opportunity tax credit which is for “qualified tuition and related expenses,” may allow you to save on your taxes for higher education expenses you incur for yourself, your spouse, or your dependents.


American Opportunity tax credit for qualified tuition and related higher education expenses

First, there are several basic facts that taxpayers need to know about taking these education and student tax credits. The max American Opportunity tax credit you can claim is $2,500 per student. According to the IRS, the credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000. Furthermore,  it is important to note that the credit is calculatied per student and not per taxpayer. For example, if you have expenses for four  children, for example, your credit may be as high as $10,000 ($2,500 × 4).


Claiming the American Opportunity Tax Credit (AOTC)

Forty percent of the American Opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the kiddie tax. See Publication 929, Tax Rules for Children and Dependents, for details.


Limitations limitation on this American Opportunity education tax credit:

  • First, the American Opportunity tax credit is only available for the first four years of the undergraduate education of the student at an eligible educational institution. In general, accredited schools offering credit towards a bachelor’s or associate’s degree (or other recognized post-high school credential), and certain vocational schools are eligible educational institutions.
  • Second, the student must be eligible, too-i.e., enrolled in a degree or certificate program at the eligible institution on at least a half-time basis.
  • Third, the student also must never have been convicted of a federal or state felony drug offense.

This tax credit is harder to claim than other education tax credits. Taxpayers can elect to claim either the credit or an above-the-line deduction for qualified tuition and related expenses.To be eligible for the credit for a year, the qualified expenses must be paid during the year for education furnished during an academic period starting within the year or within the first three months of the following year


American Opportunity tax credit is only available if a student encounters qualified tuition and related expenses.

The American Opportunity tax credit is only available if a student encounters qualified tuition and related expenses. “Qualified tuition and related expenses” are for tuition, books, and academic fees required for enrollment or attendance at an eligible educational institution. They don’t include student activity fees, athletic fees, insurance, room and board, transportation costs or other personal living expenses. Qualified expenses for purposes of the credit are reduced by scholarships.

If a tax-exempt distribution from a Coverdell education savings account, or qualified tuition program (529 plan) is received for the student in the same year, the American Opportunity tax credit may still be claimed, but only with respect to expenses not covered by the distribution.


Refundable American Opportunity Credit

Another useful aspect of this tax credit is that the credit is 40% refundable-i.e., not only can it reduce your regular tax bill to zero, it can also result in a refund. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.

The credit is reduced married taxpayers filing jointly with adjusted gross income (AGI) (with certain modifications) between $160,000 and $180,000. For taxpayers filing as single or head of household, the phase-out range is $80,000 to $90,000. Finally, no credit is available at all for taxpayers who are married and filing separately, regardless of their AGI.


Limitations on American Opportunity Tax Credit

The American Opportunity tax credit is not allowed to an individual who is claimed as a dependent on another’s tax return. Instead, the credit for that individual is claimed on the return claiming him or her as a dependent. Students may want to check with their parents if they are considered a dependent before filing a tax return. A student who isn’t claimed as a dependent can claim the credit on his or her own return, based on the expenses paid by the student.