What Is the American Opportunity Tax Credit?

Paying for college can feel ... overwhelming. After all, average tuition and fees for a 4-year private university hit a staggering $43k in 2024, and the average student loan debt for 2023 grads with loans was almost $30k. Have your sights set on college in New England? Prepare to dish out even more – institutions there are seeing an all-time high for total annual attendance costs of $90,000 or more.

The American Opportunity Tax Credit won’t solve all your higher-education financial woes, but it could help reduce your tax bill a little.

The AOTC is designed to help students and families offset the cost of the first four years of postsecondary schooling (college or trade schools, for example). Let's take a look at what it is, who qualifies and how to claim it.

UNDERSTANDING THE AMERICAN OPPORTUNITY TAX CREDIT

The AOTC is a partially refundable tax credit for qualified education expenses paid for an eligible student during the first four years of higher education. Here are some things to know:

• Partially refundable. If the credit reduces your tax even more than what you owe, you can get some of that money back as a refund.
• Qualified higher education expenses. For the purposes of the AOTC, this includes tuition, required fees and course materials at eligible schools.
• Eligibility. Students must be enrolled at least half-time in the first four years of school, plus some other details we’ll cover below.

KEY FEATURES OF THE AOTC

You can claim up to $2,500 per eligible student per year. Here’s how it works: $2,000 of qualified expenses are credited dollar-for-dollar, and 25% of the next $2,000 is also credited.

So, if you had $10,000 in expenses, you would get the first $2,000 of the credit and then 25% of the next $2,000, or $500, for a total of $2,500. The remaining $6,000 would not be eligible.

If your tax liability is less than the credit, up to $1,000 can be refunded to you (unless you are between the ages of 18 and 23, not married filing jointly and have a living parent, in which case different rules apply).

ELIGIBILITY CRITERIA FOR THE AMERICAN OPPORTUNITY CREDIT

WHO IS ELIGIBLE FOR THE AOTC?

You can qualify for the AOTC yourself if you’re an independent student, or as someone who paid qualified expenses for a dependent or spouse (If the student is claimed as your dependent, expenses are considered paid by you even if they were actually paid by the student or someone else).

The student must:

• Be pursuing a degree or recognized credential at an eligible school.
• Be enrolled at least half-time for at least one academic period during the tax year.
• Not have completed the first four years of higher education.
• Not have any felony drug convictions.

Additionally, the person filing for the AOTC must have a modified adjusted gross income below $90,000 ($180,000 for joint filers) in 2025.

You can’t claim both the AOTC and the Lifetime Learning Credit (another education credit) the same year for the same student. If you’re eligible for both, the AOTC will always be worth more.

ELIGIBLE EDUCATIONAL INSTITUTIONS

Eligible schools are those which are eligible to participate in federal student aid programs. Types of schools include 4-year universities, community colleges and trade schools.

HOW TO CLAIM THE AMERICAN OPPORTUNITY CREDIT

REQUIRED DOCUMENTATION

Claiming the AOTC is straightforward. You’ll need Form 8863, Education Credits, when filing your federal tax return. Ensure you also have received Form 1098-T from your school, which reports tuition and related expenses. Keep receipts for course materials, as these also count toward qualified expenses.

STEP-BY-STEP GUIDE TO CLAIMING THE AOTC

1. At tax time, gather your 1098-T and Form 8863.
2. Start Form 8863 by filling out Part III. This is where you’ll enter information about the student and their school, provide information from the 1098-T and go through an eligibility check. Fill out a separate Part III for any student you’re claiming education credits for.
3. You’ll then enter information about your qualifying expenses and calculate your potential credit. Enter the total amount on Line 30 and the total for all students on Part I, Line 1.
4. Complete Part I with information about your MAGI and answer the questions to determine whether any of your credit is refundable. Enter any refundable amount on your Form 1040, line 29.
5. Complete Part II to determine the nonrefundable portion of your credit and enter that amount on your Form 1040 Schedule 3, line 3.

The IRS offers some tips to help avoid common errors when claiming the AOTC:

• Make sure the student is enrolled at least half-time at an eligible institution.
• Include the school’s Employer Identification Number on the tax return.
• Make sure the student and the person claiming (if different) both have Taxpayer Identification Numbers by the tax due date.
• Keep in mind that the credit can be claimed for 4 tax years. They don’t have to be consecutive. The AOTC replaced a credit called the Hope credit, and years that the Hope credit was claimed by the student also count.
• You can claim the AOTC and the LLC on the same tax return, but not for the same student or expenses.
• Courses that are taken online or abroad can also qualify.

BENEFITS OF THE AMERICAN OPPORTUNITY CREDIT

FINANCIAL RELIEF FOR STUDENTS AND FAMILIES

When it comes to college, every little bit helps. Unlike education deductions, which lower taxable income, a credit directly reduces your tax bill. Plus, the partial refundability means you can benefit even if you owe little or no tax.

ENCOURAGING HIGHER EDUCATION

For lower- to middle-income families, the AOTC can reduce the financial burden by up to $10,000 for each student across four years of school. For many in-state colleges or trade schools, that’s a year of tuition.

It could mean the difference between pursuing higher education or not. And evidence still shows that a degree is valuable – the Education Data Initiative calculated that a bachelor's degree could add an average of about $2 million to lifetime income.

MISCONCEPTIONS ABOUT THE AOTC

Myth 1: You can’t claim the AOTC for graduate school.
Fact: To be eligible for the AOTC, you must not have completed the first 4 years of postsecondary schooling at the start of the tax year. So, you could still claim the AOTC for grad school expenses if, for example, you were still finishing year four of your undergrad degree at the start of the year and then immediately started grad school later that year.
 
Myth 2: You can claim the AOTC indefinitely.
Fact: You can only claim it for four tax years per eligible student.
 
Myth 3: It covers all education expenses.
Fact: Only qualified expenses like tuition, fees and course materials count – not room, board or transportation.

SPEAK TO AN ADVISOR ABOUT YOUR EDUCATION SAVINGS

The $2,500 American Opportunity Tax Credit can help cover tuition, fees and course materials – a valuable way to support your education. But it’s likely just one piece of the financial picture when it comes to paying for higher education, which can also include other credits, deductions, college savings accounts and loans. Working with a tax professional and a financial advisor can help you decide how to best fit college into your savings goals and take advantage of potential benefits that could give you a boost.