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Qualifications

The American Opportunity Credit is a credit for post-secondary costs applied to decrease the taxes owed by a student, their spouse, and/or a dependent.  The credit is designed to help qualifying low to moderate income persons cover the significant fees related to post-secondary education. 

The university or educational institution will provide the student with a Form 1098-T listing potentially applicable education expenses.

Qualifying Students

• As of the beginning of the tax year, the student has completed less than four years of a post-secondary program.
• Student must have been enrolled at least half time for a minimum of one academic termin a program that will result in some type of recognized credential. 
• Student has no felony convictions related to the possession or distribution of a controlled substance.

Qualifying Institutions:

• Accredited vocational schools, colleges, or universities (domestic or international) that are authorized to participate in the Federal Student Aid program. 

Qualifying Claimants:

• The eligible student can be the taxpayer, the taxpayer’s spouse, or a dependent on the tax return.
• Only one person can claim the credit for the qualifying period.
• The credit can only be claimed for four tax years. If it has previously been claimed for four tax years, it cannot be claimed again.
• Taxpayer is not Married Filing Separately
• Taxpayer(s) cannot be a dependent on another tax return
• Taxpayer(s) AND the Student have a valid SSN, ATIN, or ITIN before the tax deadline.
• Taxpayer(s) AGI is below the established limit
• Taxpayer(s) are not and were not during the tax year a non-resident alien (or the taxpayer(s) chose to be treated as a resident alien)

The credit is calculated per student; a single taxpayer can claim the AOC for more than one qualifying student.

General Rules:

• The taxpayer or a dependent can claim the credit, but not both.

Payment:

Costs are included, even if the student had to borrow the funds or take out a loan to finance their studies.

The credit should be claimed on the tax return the year the costs are incurred, not when any borrowings or loans are paid off.

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Applicable Costs

Timing:

Those qualifying costs paid for in that were paid for in the tax year (and the first three months of the following year if paid for in the tax year). 

[This includes a course paid for in 2022 but where the class started between January – March]

Costs:  Tuition, Textbooks, and Certain Expenses required by the institution for registration / attendance. 

If used, but not required by the institution, it may not qualify as an applicable cost.  The fact that the resources was purchased directly from the institution (e.g., at the bookstore) does not automatically make it an applicable cost.

• Tuition
• Textbooks (Do not have to be purchased from the institution directly)
• Supplies
• Equipment
• Student Activity Fees
• Enrollment Fees
• Other Course Materials
• Activities or Non-Credit Courses (Only included if the program is part of the student’s degree program).

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Limitations

Time Limit:

• Can only be claimed for 4 years per student

Non-Qualifying Costs:

• Room & Board
• Health or Medical Fees
• Insurance
• Transportation
• Personal Expenditures

These do not qualify as acceptable costs, even if they are required by the institution for registration/attendance.

Expenses Paid for with Scholarships, Grants, or Employer-Assistance:

When expenses are covered with tax-free scholarships, grants, or employer-assistance, the taxpayer cannot claim those costs for the American Opportunity Credit.

Double-Claiming

Expenses can only be claimed once on the tax return. If they are claimed elsewhere on the return (e.g., under a tax free distribution from an education savings plan), the taxpayer cannot claim those costs for the American Opportunity Credit.

The same is true of the Lifetime Learning Credit – it cannot be claimed for the same student as the American Opportunity Credit.

Refunded Costs

Refunded costs are not qualifying expenses. If the refund arrives after the taxpayer’s return has been filed, they may need to pay part of their education credit back to the IRS.

Modified Adjusted Gross Income (MAGI) Limits

The credit a taxpayer is allowed to claim will begin to decline when their MAGI hits $80,000 (Single) | $160,000 (MFJ). 

The taxpayer cannot claim the AOC if their MAGI is $90,000+ (Single, HoH, QW) | $180,000+ (MFJ).

Unclaimed Refundable Credit

The student cannot claim the refundable part of the AOC if the following applies:

• Age Limit
  • Student was under 18 at the end of the tax year
  • Student was 18 or older, but younger than 24 and their earned income is <50% of their support
• Dependency
  • At least one of the student’s parents were alive.
• Filing Status
  • Student was not filing a joint tax return.

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Calculation

Maximum Applicable Costs: $4,000

• 100% of the first $2,000 = Up to $2,000 in available credit
• 25% of the next $2,000 = Up to $500 in available credit

Maximum Possible Credit = $2,500

Once calculated, the credit will be divided into a Refundable (40%) and Non-Refundable (60%) portion.

Maximum Refundable Credit = $1,000
Maximum Non-Refundable Credit = $1,500

The refundable portion can be applied to offset the taxpayers’ AMT.

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On taxpayers with MAGI of less than $90,000 (Single) | $180,000 (MFJ) will be allowed to claim the AOC.

It will also begin to decline when the taxpayer’s MAGI reaches $80,000 (Single) | $160,000 (MFJ) until it reaches $0.00.

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Resources

Form 8863 – Education Credits
Form 1098-T – Tuition Statement
Form 1098-E – Student Loan Interest Statement
Form 5498-ESA – Coverdell ESA Contribution
Form 1099-Q – Payments from Qualified Education Program

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