The AOTC: The Tax Credit You or Your College Student Might Be Overlooking

Every year, you can count on a few easily overlooked but fairly simple tax strategies that are quite generous from our government. 

If you are a college student (or the parent of a college student who you claim as a dependent), the American Opportunity Tax Credit (AOTC) could be one of those generous strategies.

The AOTC is a "refundable" tax credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can receive a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit (up to $1,000) can be refunded. 

For example, Stacey is 19, a dependent of Jan and Les, in college, and has earned $5,000 of income in 2018. She files on Jan and Les's return. Let's also assume that Stacey's tax liability (the amount she owes) comes to $0.

The AOTC, if filed correctly, could mean the federal government will issue back a check for $1,000. I don't know many college students who wouldn't think that is eye-poppingly great, but I guess, for Stacey, it will all depend on whether Jan and Les want to give her the $1,000 or pocket it themselves.

The amount of the credit is 100 percent of the first $2,000 of qualified education expenses paid, and 25 percent of the next $2,000 of qualified education expenses that you paid for the student. But if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you.

Who Is an Eligible Student for AOTC?

To be eligible for AOTC, the student must:

  • Be pursuing a degree or other recognized education credential

  • Be enrolled at least half time for at least one academic period¹ beginning in the tax year

  • Not have finished the first four years of higher education at the beginning of the tax year

  • Not have claimed the AOTC or the former Hope credit for more than four tax years

  • Not have a felony drug conviction at the end of the tax year

Claiming the Credit

To claim the AOTC or the lifetime learning credit (LLC), a taxpayer (or dependent) must have received Form 1098-T, Tuition Statement, from an eligible educational institution, whether domestic or foreign. Generally, students receive a Form 1098-T  from their school by January 31.

This statement will help you figure out your credit. Box 1 will show the amounts received during the year. However, this amount may not be the amount you can claim. See qualified education expenses for more information on what amount to claim.

Check Form 1098-T to make sure it is correct. If it isn’t correct or you did not receive the form, contact your school.

To claim AOTC, you must complete Form 8863, Education Credits, and attach it to your Form 1040.

Be Careful Claiming the AOTC

Make sure you are qualified before claiming the credit. And make sure you keep copies of the documents you used to determine if you qualified and the amount of your credit.

If the IRS audits your return and finds your AOTC claim is incorrect and you don’t have the documents to show you qualified, you must pay back the amount of the AOTC you received in error—with interest. The IRS may also charge you an accuracy or fraud penalty. Or you can be banned from claiming the AOTC for two to 10 years.

What Are the Income Limits for AOTC?

  • To claim the full credit, your modified adjusted gross income (MAGI)² must be $80,000 or less ($160,000 or less for married filing jointly).

  • You will receive a reduced credit amount if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).

  • You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

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[1] Academic periods can be semesters, trimesters, quarters, or any other period of study, such as a summer school session. The schools determine the academic periods. For schools that use clock or credit hours and do not have academic terms, the payment period may be treated as an academic period.

[2] For most people eligible for the AOTC, MAGI is the amount of adjusted gross income (AGI) shown on your tax return.