The American Opportunity Tax Credit is a tax credit worth up to $2,500 each year to help offset qualified education expenses for higher education. The credit is a tax break for the first four years of college for each eligible student, and is meant to cover qualified tuition and expenses. You can qualify for the AOTC for your dependent’s education expenses.
A nice feature of the AOTC is that, unlike the Lifetime Learning Credit, you can get a portion of the credit refunded to you. If the credit brings the amount of tax you owe to zero, the IRS will refund you 40 percent of any remaining amount of credit, up to a maximum of $1,000.
What is the American Opportunity Tax Credit?
This tax credit helps reduce taxes for people who are paying for higher education. The way the credit is calculated is not entirely straightforward: You’ll be credited for 100 percent of the first $2,000 of qualified education expenses for each eligible student, and then 25 percent of the next $2,000 of expenses, for a total of up to $2,500.
To qualify for the AOTC, your income must fall within specific income limits, the student’s education program and school expenses must meet the eligibility requirements outlined by the IRS, and you must follow the instructions to claim the AOTC. The IRS warns that if you fail to have the necessary supporting documents to substantiate claiming the credit, you risk having to pay back the credit with interest, among other potential consequences.
Income limits for the AOTC
The AOTC can be a nice tax break for eligible college students (or the parents who support them), but there are income limits on eligibility, based on your modified adjusted gross income (MAGI).
Generally, MAGI is your adjusted gross income (AGI) with certain deductions added back in. The specific list of items that are added back varies by type of tax break.
For the AOTC, your MAGI is calculated by adding back these items to your AGI:
- Foreign earned income exclusion
- Foreign housing exclusion
- Foreign housing deduction
- Income exclusion by residents of American Samoa or Puerto Rico
For most taxpayers, their MAGI for the purposes of the American Opportunity Tax Credit will be the same as their AGI. The IRS has a worksheet for calculating MAGI for the AOTC.
Here’s how much of the $2,500 annual credit you can claim, depending on your modified adjusted gross income for tax years 2024 and 2025:
| Single, head of household or qualifying surviving spouse |
Married filing jointly | |
|---|---|---|
| Full tax credit | $80,000 or less | $160,000 or less |
| Partial tax credit | $80,000 to $90,000 | $160,000 to $180,000 |
| Ineligible for the tax credit | $90,000 or more | $180,000 or more |
Eligible expenses for the AOTC
To claim the American Opportunity Tax Credit, the student must be working towards a degree or other recognized education credential at a higher education institution and be enrolled at least half-time.
What’s more, to be eligible for the credit, the student must be in the first four years of higher education, must not have claimed this credit for more than four tax years and can’t have a felony drug conviction.
So long as those requirements are met, the student can claim the credit for the following qualified education expenses:
- Tuition and fees that are required to be paid to the school.
- Books, supplies, and equipment needed for a course of study, regardless of where those materials were purchased.
However, the credit won’t cover other expenses — even if they’re required as a condition of enrollment or attendance — like room and board, medical expenses, insurance, transportation, noncredit courses and comprehensive or bundled fees.
You should receive a Form 1098-T for each student who attended a college or university — this form shows payments received for qualified education expenses. That said, the amount on Form 1098-T may differ from the amount you paid. If the 1098-T is incorrect, the IRS advises taxpayers to contact the school and request a corrected form.
You may still be eligible to claim the credit even if you didn’t receive a Form 1098-T but you’ll need to document your qualified education expenses. See this IRS Q&A for more information on what to do if you didn’t receive a Form 1098-T.
How to claim the AOTC
To claim the AOTC, you’ll need to complete Form 8863 (see IRS instructions for Form 8863). Any reputable tax software company will guide you through the process of filling out this form.
You can claim up to $2,500 each year for each eligible student to cover qualified education expenses for the first four years of higher education.
The amount of credit you can claim depends on your modified adjusted gross income, along with the amount of your expenses. For tax years 2024 and 2025, the total credit you can receive is $2,500 — that’s 100 percent of the first $2,000 of qualified education expenses and 25 percent of the next $2,000 of qualified education expenses.
You may receive some of the credit refunded to you if the credit brings the amount of tax you owe to zero. In that case, you may receive 40 percent of the remaining credit refunded to you, up to $1,000.
You can claim the credit whether or not you received a Form 1098-T but be sure to keep copies of all documents you used to identify both your eligibility and the amount of credit owed.
If the IRS finds your AOTC claim is incorrect and you don’t have the necessary documents to demonstrate your eligibility, you may be reqquired to pay back the amount of the credit you received with interest. Plus, you may be charged a penalty, or banned from claiming the credit for up to 10 years.
AOTC versus Lifetime Learning Credit
Both the American Opportunity Tax Credit and the Lifetime Learning Credit (LLC) help to cover the costs of higher education, but you can’t claim both of them for the same student in the same year.
Here are some key differences between the two credits:
- Amount of credit: The AOTC Is worth up to $2,500 per eligible student per year, compared with up to $2,000 for the LLC.
- How long the credit is available: There’s no limit to the number of years that you can claim the Lifetime Learning Credit, whereas the American Opportunity Tax Credit can only be claimed for the first four years of post-secondary education.
- Refundable credit: Up to 40 percent of the eligible AOTC is refundable, whereas the LLC is nonrefundable.
When deciding which credit to claim, you may want to consider claiming the American Opportunity Tax Credit for students in their first four years of an undergraduate degree, and then claim the Lifetime Learning Credit to cover eligible expenses for graduate school or for continuing education programs.
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