The American Opportunity Tax Credit (AOTC) provides college students or their parents with a tax credit for eligible expenses of up to $2,500 per year, starting with an initial $4,000. Students are only eligible to enter the first four years of college and must enroll at least halfway through.

Unlike other higher education tax credits, AOTC’s qualifying expenses extend to books and utilities. This is also a refundable tax credit. This means you can get an income tax refund on partial funds of up to $1,000 if your balance reduces your taxes to zero or less.

Eligibility for AOTC is serious because you may face tax penalties if you file incorrectly. Eligibility is determined by course load, schooling and income-based rules. Taxpayers cannot apply for AOTC if their revised adjusted gross income exceeds $90,000 as a single filer or more than $180,000 as a joint filer.

U.S. Opportunity Tax Credit and Lifelong Learning Credit

AOTC covers a wider range of fees than Lifelong Learning Credits (LLCs). At $2,500 per year, it also offers a larger credit than the $2,000 per return offered by the LLC. However, LLCs can apply indefinitely, while AOTCs are limited to the first four years.

LLCs are great for students who have exhausted their AOTC eligibility but still have fees deducted. While it doesn’t include course materials, it still provides an opportunity to claim up to $2,000 per year in tax credits for tuition and fees — room and board not allowed. If for some reason getting a four-year degree takes longer, or your goal is to go to graduate school, an LLC is a great tax credit option.


When to choose an LLC: LLCs are for students who are not pursuing a specific degree or other recognized educational credential but are looking to enhance their professional skills. For example, if you decide to take a medical programming course or an office accounting course at a technical college to advance your career, you can do so and earn credit without enrolling in the full course. Your LLC eligibility ends with lower adjusted gross income limits, ranging from $69,000 for single filers to $138,000 for joint filers.

When to choose AOTC: For independent students or parents who meet MAGI or modified AOTC eligibility Adjusted Gross Income Guidelines, this credit is the best option for the first four years of college because it gives you more credit toward receiving fees. This includes textbooks and required course materials. For example, the computer or software needed to design a course counts as delivery, but the purchase of a general-purpose computer does not. AOTC can also send you cash injections. Unless you’re one of the few college students with no cash flow issues, getting a tax rebate of up to $1,000 is a huge economic boost. LLCs do not offer refundable lines of credit.

Eligibility for the U.S. Opportunity Tax Credit

AOTC allows you to claim up to $2,500 in qualifying educational expenses. For eligible students, the first $2,000 fee will be paid in U.S. dollars. The next $2,000 is paid at a 25% rate, or $0.25 per $1, which means a $2,000 fee is required to generate the additional $500 credit.


A prerequisite for the reduction is a review of admissions requirements and income guidelines. Recipients of AOTC credits must be pursuing a degree or qualification and at least half are enrolled in the semester, trimester, or quarter commencing in the tax year, e.g. B. 2021 2021 tax returns, only for the first four years of university study , no more than four years to apply. Students also must not be convicted of a felony drug offense to qualify. Students need Form 1098-T, a tuition statement provided by the college, to be eligible.

To apply for a full loan, a single applicant must have a MAGI of $80,000 or less. For those who are married and file jointly, the limit increases to $160,000. MAGI’s credit limit expires over $90,000 for singles and over $180,000 for joint filers. If your MAGI is between $80,000 and $90,000, you’re still eligible, but you’ll receive less credit.

According to the IRS, for most student loan applicants, MAGI is Adjusted Gross Income, or AGI, on the tax return. However, if you earn your income abroad, you may need to make additional calculations. See IRS Publication 970, Educational Tax Benefits, to access the worksheet used to calculate MAGI for AOTC.

Unlike tax deductions, which reduce your taxable income, tax credits reduce the amount of tax you owe. Most income tax credits expire when you reach your $0 tax bill and do not accrue a refund. AOTC offers refunds of up to $1,000, making it a valuable asset.


Reimbursement amounts are based on the 40% rule. Calculate your balance by multiplying the balance after your tax bill reaches $0 by 40%. To get the full $1,000, you must claim the $2,500 credit and owe $0 in taxes. If you still have $2,000 in credit after paying your taxes, you can multiply $2,000 by 40% to get a $800 refund. If you file your tax return independently, you will receive a refund. If you are claimed to be dependent on your parents for taxes, that goes to the taxpayer. Parents with multiple dependents at the college may apply for one credit for each eligible student.

How to Apply for the U.S. Opportunity Tax Credit

To apply for AOTC, you must refer to the core income tax file Form 1040. On page 1, enter the required information about your household members, income, and deductions. Look for the line “This is your adjusted gross income.” You need this sum to calculate your MAGI.

In publication 970, enter your AGI on the worksheet titled MAGI for the American Opportunity Tax Credit. Deductions: Foreign employment income, foreign residential property deductions, and income from Puerto Rico and American Samoa. This is your MAGI, which will be recorded on Form 8863, Education Credits.

The third part of Form 8863 extracts information from the 1098-T form sent by the college and asks questions about eligibility, such as: B. Number of tax years reported and whether there is a conviction for substance abuse. You then enter the total amount of eligible expenses, including tuition, course fees, and the cost of textbooks and required materials. This form will guide you in calculating your credit limit. Then transfer that information to the first part of the form.

The first part will guide you through determining your eligibility based on income. If you are eligible, the 40% rule will be used to determine your refundable balance amount. Refundable and non-refundable points are entered separately on the 1040, which means you apply for AOTC on two separate entries. Your non-refundable balance amount will be included in Part II and added to other credits and payments on Schedule 3 of the form before being transferred to 1040.


Final result

AOTC is a great opportunity to recoup some of the cost of higher education, whether you are a student or a parent supporting your child through college. Use Publication 970 to determine if you are eligible for credit.

Jake Smith

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Jake Smith

He is the editor of Eragoncred. Previously, he was editor-in-chief of Eragoncred and a financial industry reporter. Jake has spent most of his career as a Digital Media journalist and has over 10 years of experience as a writer and editor.