If you or one of your kiddos are going to college, we don’t have to tell you—it’s expensive.
Correction: ridiculously expensive.
And in this economy, don’t expect the price of higher education to drop anytime soon.
In fact, the price of pursuing a degree at a public school has been steadily climbing in recent years. Case in point: Average tuition and fees for a four-year degree at a public school in 2021–2022 was $9,700, which was 6% higher than the average price of $9,100 in 2010–2011.1
And that’s a pittance compared to private school costs. We’re talking average tuition and fee costs of $38,800 for the 2021–2022 school year, and that was up 14% compared to the 2010–2011 average of $34,000.2 Sheesh!
But with the prices of tuition, room and board, and textbooks going up, there is a silver lining when tax season rolls around—the American opportunity tax credit (AOTC).
This credit can save eligible taxpayers up to $2,500 on qualified higher education expenses. And an extra $2,500 ain’t too shabby when it comes to buying those ginormous chemistry textbooks that weigh as much as your first car and probably cost as much too.
So, let’s go over everything you need to know about the AOTC and see if you or your college-aged dependent qualify for it. Hey, every penny counts, right?
What Is the American Opportunity Tax Credit (AOTC)?
The American opportunity tax credit (AOTC) is a tax credit aimed at helping students or their parents offset the cost of higher education. If you or your dependent meet the eligibility requirements for the AOTC, you could receive a credit of up to $2,500 for qualified college expenses, like tuition, fees and course materials.
And there’s more good news: The AOTC is partially refundable. That means if there’s any credit left over after you’ve paid your taxes, you’ll get back a percentage of it as a refund. Sweet!
American Opportunity Tax Credit (AOTC) Rules
Okay, guys. The American opportunity tax credit is a nice tax break for someone paying for a college degree, but there are some rules you need to know about when it comes to who’s eligible for the AOTC and what kind of school-related expenses it covers.
To qualify for the American opportunity tax credit, you have to meet these three requirements:
- You pay qualified educational expenses for higher education.
- Those qualified expenses are for an eligible student (more on what makes a student eligible below).
- The eligible student is either you, your spouse or a dependent who you claim on your tax return.
You cannot claim the AOTC if:
- Your filing status is married filing separately.
- You are claimed as a dependent on someone else’s tax return.
- You claim the lifetime learning credit (LLC) for the same student during the same tax year (more on this credit later).
- Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more if married filing jointly).3 Time out—what is MAGI? In the simplest terms, it’s your adjusted gross income (AGI) plus a few deductions (like student loan interest or tuition and fees) added back in. That’s the modified part!
Now let’s look at what makes a student eligible for the AOTC. A student is eligible when:
- They’re enrolled for at least one academic period (like a quarter or semester) that begins in the tax year.
- They’re enrolled at least part time.
- They’re enrolled in an undergraduate program that leads to a degree, certificate or other recognized educational credential.
- They have not yet completed the first four years of undergraduate studies as of the beginning of the tax year.
- They have claimed the AOTC fewer than four times already. (You can only claim it four times because it’s meant to help with the costs of undergraduate studies, like a four-year degree.)4
Whew! Those eligibility rules are exhaustive and exhausting. But then, what do you expect? It is the IRS we’re talking about here. We’re pretty sure their motto is “Fac ut turpis,” Latin for “Make it complicated.”
Don’t settle for tax software with hidden fees or agendas. Use one that’s on your side—Ramsey SmartTax.
Okay, maybe not. But it should be.
So if you, your spouse or your dependent meets all these requirements, then you’re eligible for the AOTC. But that’s just half the puzzle. Now let’s go over the other half and explore which school-related expenses qualify.
Qualified educational expenses that the American opportunity tax credit covers include:
- Any fees paid to the school as a condition of enrollment or attendance
- Supplies and equipment (yep, this includes those expensive laptops and tablets used for class)
Keep in mind that if you pay for qualifying expenses with any of the following financial aid resources, those funds are disqualified, and you’ll have to deduct those amounts from your AOTC claim (Uncle Sam doesn’t want you double dipping in the benefits bowl):
- Tax-free scholarships
- Tax-free fellowships
- Funds from a 529 savings plan
- Tuition grants from an employer
- Federal Pell grants
- Refunds from the school
- Other nontaxable assistance you receive, other than gifts and inheritances.
Okay, folks, we’ve talked about which educational expenses the AOTC will cover, but what expenses aren’t covered? Check it out:
- Insurance (think medical or auto insurance for students)
- Room and board (including dorm fees)
- Transportation costs
- Medical expenses (including student health fees)
- Living expenses5
To be eligible for the full AOTC credit, your modified adjusted gross income (MAGI) must be $80,000 or less if you’re single and $160,000 if you file as married, filing jointly.
If your MAGI is over these limits, the credit amount you’re eligible for starts phasing out, and it disappears entirely if your MAGI is above $90,000 ($180,000 for married, filing jointly).6
Calculating the American Opportunity Tax Credit
Calculating the AOTC is a bit more complicated than just adding up all your qualified expenses and applying the $2,500 credit to your total.
Instead, the expense calculations are broken into two parts. The AOTC is applied to:
- 100% of the first $2,000 of qualified expenses, plus . . .
- 25% of the expenses that exceed the first $2,0007
And, of course, the maximum annual credit per student is $2,500, but that total credit amount might be lower for you—it depends on your income (we hit on the income limits above).
Here’s an example of how it all breaks down:
Let’s say Devin is working and going to college part time in 2023. He earned $25,000 this year and his tuition came out to $7,500.
Devin takes the standard tax deduction, which is $12,950 for a single filer. That leaves him $12,050 in taxable income. So before the AOTC is applied, Devin owes $1,244 in taxes.
Because Devin is enrolled at least part time and his income is under $80,000, he qualifies for the full AOTC amount of $2,500 (the first $2,000 in expenses plus 25% of the next $2,000 in expenses).
Now, $1,000 of the AOTC credit is refundable (40% of $2,500), while the remaining $1,500 is nonrefundable.
The nonrefundable $1,500 portion of the credit is applied to Devin’s $1,244 tax bill first, and it brings his tax bill down to $0 (and since the remaining $256 is nonrefundable, Devin won’t see that money—it simply goes away).
But now that Devin won’t owe any taxes after the nonrefundable portion of the credit is applied, he’ll receive the entire $1,000 refundable portion as part of his tax refund.
AOTC vs. Lifetime Learning Credit (LLC)
The AOTC isn’t the only tax break that can help with the costs of tuition and supplies. Another popular tax credit for college students is the lifetime learning credit (LLC).
The LLC was enacted in the Taxpayer Relief Act of 1997. It aims to help with the cost of higher education by giving qualified students or parents who claim students as dependents a credit of up to $2,000 on eligible school expenses they paid for during the tax year.
Before we jump into the details of how the LLC works compared to the AOTC, keep in mind that you can’t claim both of these credits for a single student in the same year. Uncle Sam only allows one tax credit per student, per year. No double dipping!
So, which tax credit should you choose? Well, for most students in their first four years of college, the American opportunity credit offers the bigger bang for your buck. And that’s because while the LLC can save you up to $2,000 in taxes per tax return, the maximum amount for the AOTC is $2,500 per student. And on top of that, up to $1,000 of the AOTC is refundable!
Let’s take a look at how those key differences break down.
Lifetime Learning Credit (LLC)
American Opportunities Tax Credit (AOTC)
What is the maximum benefit?
Up to $2,000 credit per tax return.
Up to $2,500 credit per eligible student.
How is the credit calculated?
20% of the first $10,000 of eligible expenses paid during the tax year.
100% of the first $2,000 of eligible expenses, plus
25% of the next $2,000, paid during the tax year.
Is the credit refundable or nonrefundable?
Partially refundable (40% of the credit is refundable).
What educational expenses are eligible for the credit?
Tuition, fees, books, and equipment required for enrollment.
Tuition and fees. Books and equipment must be purchased directly from the institution as a condition of enrollment.
Which students are eligible for the credit?
The credit is available for undergraduate and graduate students, and for anyone taking courses for job development or continuing education.
Students don’t need to pursue a degree or other recognized education credential to claim the credit.
The credit is only available for students who haven’t completed four years of undergraduate college education.
Students must be pursuing a degree or other recognized education credential to claim the credit.
How many courses taken are necessary to claim the credit?
Available for any student taking one or more courses.
Student must be enrolled at least half time for at least one academic period.
How many tax years is the credit available for?
Only available for four tax years per student.
What are the income limits (MAGI) for the credit?
$180,000 for married filing jointly, $90,000 for single filers.
Married filing separately cannot claim the credit.
$180,000 for married filing jointly, $90,000 for single filers.
Married filing separately cannot claim the credit.
As you can see, one of the downsides of the lifetime learning credit when compared to the AOTC is that the LLC is nonrefundable.
In other words, if you can only claim $1,000 in qualified expenses for the LLC and your tax liability is $0, you won’t be getting a refund of $1,000 from Uncle Sam. That’s why most students are better off going for the AOTC over the LLC as a tax credit each year.
How Do I Claim the American Opportunity Tax Credit?
Okay, guys—claiming the AOTC is pretty straightforward.
As a student paying tuition, you should receive a Form 1098-T, Tuition Statement, from your school by January 31. Use this statement to help calculate your qualified expenses amount for the AOTC.
Once you know how much you can claim for the AOTC, complete Form 8863, Education Credit, and attach it to your tax return. Heads up—there are several bits of information you’ll need to complete Form 8863, including the following:9
- Student’s Social Security number
- Name and address of the school the student attends
- Adjusted qualified expenses amount (how much you can claim for the AOTC)
- Your (or you and your spouse’s if you file married, filing jointly) modified adjusted gross income (MAGI)
Get Your AOTC Questions Answered
Paying for college can be stressful, so when Uncle Sam offers a tax break to help offset those costs, take advantage of it! We’ve covered a lot of the details surrounding the American opportunity tax credit, but if you still have questions, get in touch with a tax expert.
Our RamseyTrusted tax advisors can help you figure out if you’re eligible for the AOTC and if so, how much it can help you save.
If you’re ready to claim the AOTC and file your taxes, check out Ramsey SmartTax. It’s our easy-to-use tax software that provides access to all federal forms and tax deductions without any hidden fees.
Frequently Asked Questions
Can I claim the AOTC and the Lifetime Learning Credit?
Let’s start with the bad news—you can’t claim both the AOTC and the LLC for the same student or the same school expenses on the same tax return.
But let’s say you’re a parent with two or more kiddos in college. In that case, you might be paying for expensive textbooks, fees for who knows what, and lab equipment that your kids will use one time in chem class and never need again as long as they live.
You definitely need all the tax breaks you can get! And there’s good news—you can claim the AOTC for one child’s qualifying expenses and the LLC for another child’s expenses.
Can I claim the AOTC if I get a grant?
Yes, you can claim the AOTC even if you or your dependent got a grant, but there’s a catch. You’ll have to subtract the grant amount from the total amount of your qualified expenses before claiming the AOTC. Again, Uncle Sam doesn’t want you double dipping in the freebies bowl.
Here’s an example: If your total costs on qualified expenses comes to $3,500 and you received a $2,000 grant, then you would only be able to claim $1,500 of qualified expenses for the AOTC.
So, what counts as a grant when it comes to the AOTC? Take a look:
- Pell grants and other needs-based education grants
- Tax-free parts of scholarships and fellowships
- Any financial assistance from employers
- Veterans’ educational assistance
- Any other tax-free assistance you receive for education, excluding gifts and inheritances10
What funds do not reduce my qualified eductaional expenses for the AOTC?
You can use money to pay for college from lots of sources and it will not affect your AOTC. Some of these are common sense—like paying with money from your savings account—but we’re listing all the safe options just so you know for sure you won’t break that double-dipping rule.
- Scholarships or fellowships reported as income on the student’s tax return when the use of that money isn’t restricted
- Payments for services, like wages
- Student’s personal savings
- Money from loans (Pssst…take it from everyone whose student loan payments just started back up—student loans are a trap. And the fact that they don’t affect how much in qualified expenses you can claim on the AOTC doesn’t change the truth about how terrible student loan debt can be. And one more thing—if you’re feeling the pressure of those newly restarted student loan payments, we’ve got good news. You can take control of your student loans. It won’t be quick or easy, but it will be worth it.)11