American Opportunity Tax Credit: Eligibility, Limits, And Application Process

The American Opportunity Tax Credit (AOTC) is a boon for students opting for post-secondary education. If you qualify, you can get a maximum annual award of $2,500. In case the total credit lowers your tax to zero, you’ll still be entitled to receive at least 40% of the remaining amount up to $1,000.

Keep reading to learn how the American Opportunity Tax Credit works and how you can benefit from it.

What Is The AOTC?

This credit is provided to eligible students to help them make payments towards expenses related to higher education. It provides an annual credit of $2,500 for every qualified student. 

Usually, the credit provides more tax benefits than a tuition deduction. This is because it decreases the tax you owe on a dollar-for-dollar basis rather than merely lowering the amount of income that’s subject to annual filings. However, to qualify for this assistance, there are a variety of eligibility requirements.

Eligibility Criteria

To be eligible for the American Opportunity Tax Credit, you must meet the following criteria:

• Studying for a degree or any other recognized certification
• Registered at least half-time for a minimum of one academic period at the beginning of the tax year
• At the beginning of the tax year, you mustn’t have finished the first four years of higher education
• Haven’t claimed the AOTC or the Hope credit for more than four tax years
• Wasn’t convicted of a drug felony by the end of the tax year

Applicants will need to understand that the schools determine the academic periods. These periods can include semesters, trimesters, quarters, or other types of studies such as summer school. If the college doesn’t follow these terms and uses clock or credit hours, the payment period will be considered an academic period.

Income Limits For Claiming AOTC

• To claim the entire amount, the modified adjusted gross income (MAGI) needs to be lower than $80,000. Similarly, for married applicants filing jointly, it needs to be no more than $160,000
• Applicants will receive a reduced amount if the modified adjusted gross income goes over $80,000 but not when it’s more than $90,000. The same can be applied to married candidates with incomes that are greater than $160,000, however, not if it’s above $180,000 
• Therefore, candidates can’t claim any amount if the MAGI is over $90,000. For married applicants, this limit is $180,000 jointly 

For applicants filing Form 1040, the following amount should be added to adjusted gross income (AGI): 

• Foreign housing exclusion 
• Foreign earned income exclusion 
• Foreign housing deduction 
• Exclusion of income through bona fide residents of Puerto Rico and American Samoa 

Qualified Expenses

Generally, qualified expenses for the AOTC include tuition fees and other essential expenses for attendance or enrollment in a post-secondary education institution. To qualify, the expenses paid during the taxable year must be related to either the academic period beginning in a similar tax year or an academic year that starts in the initial three months of the tax year. 

Some of the costs that aren’t qualified include the following: 

• Transportation 
• Room and board 
• Insurance 
• Medical expenses 
• Student fees (unless required as part of enrollment or attendance)
• Same expenses paid with tax-free educational assistance 
• Same fees used to pay for other tax deductions, educational or credit benefits 

Qualified expenses for AOTC include other expenditures related to the course like course material, tuition fees, and other essential costs. In this context, ‘course materials’ includes supplies, equipment, and books needed for studying. It doesn’t matter if the materials are purchased from an educational institution or not.

How To Claim The Credit

To be eligible to claim the AOTC, you must start by collecting the Form 1098-T and the tuition statement from an eligible institution (domestic or foreign). Usually, students receive these documents from the school on or before January 31 every year. These documents help assess the eligibility of the applicant. 

The form reveals the amount in box one, which indicates the total amount received in that particular year. However, this may not be the amount you can claim. Review the list of qualified expenses in Publication 970 and verify that the form you’ve received has the correct entries.

Finally, to request AOTC, you must complete Form 8863 and attach it to Form 1040 or 1040-A.

Things To Keep In Mind

There are two things every applicant must keep in mind while claiming the AOTC. These are:

Claim it only if you’re qualified:

• Make a claim only if you qualify for the AOTC 
• Be prepared with all the relevant document copies required for qualifying and determining the eligible amount 
• If the IRS audits your return, marks your American Opportunity Tax Credit claim as incorrect, or you don’t have sufficient documents to justify that you qualify, you’ll need to refund the amount in full

You must have a valid taxpayer identification number (TIN):

• You can’t claim the AOTC unless you, the qualifying student, or your spouse have a valid taxpayer identification number that’s applied or issued before or on the due date of the return 
• If the TIN is released or applied after the due date of the return (including the extensions), you can’t demand the credit on a later original return or an amended return

The Bottom Line

Overall, the American Opportunity Tax Credit ranks among the best opportunities for taxpayers in America. It helps with defraying the costs related to post-secondary education.

The amount is enough to cover a good portion of costs related to education every academic year.

Make sure to get your documents in order and apply for credit on your qualified educational expenses.