The American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) is a tax credit for  education expenses for a qualified student (who is a taxpayer) for the first four years of post-secondary education.

In 2009, the American Opportunity Tax Credit was introduced into the system with the ultimate goal of providing funds for students who were willing to attend post-secondary institutions such as universities or colleges. Students who qualify for the American opportunity tax credit could receive as much as $2,500 to reduce expenses meant for education such as tuition fees, student course work and more.

A student who qualifies for the American opportunity tax credit could claim the money in two ways. First, 100% of the first $2,000 can be claimed completely and used to purchase materials needed for the study. This is followed by claiming another 25% of the $2,000 which is equivalent to $500. This makes the total amount of money claimed by any qualified student to be $2,500.

Unlike other tax credits that are usually non-refundable, the American opportunity tax credit is refundable. A taxpayer can get 40% of the American opportunity tax credit refunded in a situation where his or her liability has been cut down. The Internal Revenue Service is the body that usually makes the 40% refund to the taxpayer.

Unique Features of the American Opportunity Tax Credit

• The American opportunity tax credit is a means that is used by the government to subsidize expenses for higher education, reduce the income tax liability for parents and their wards as well as reducing Lifetime Learning Credit (LLC) and educational fees.

• The American opportunity tax credit is one of the two tax credits that American students usually qualify for. The other tax credit is the Lifetime Learning Credit. Distinguishing factors between these two types of learning credit is that while the American opportunity tax credit is available to students pursuing post-secondary education and a certain percentage of the credit can be refundable, the LLC covers a broad category of students at all levels of education and it is not refundable.

• The American opportunity tax credit and the LLC are available to U.S. taxpayers and both cannot be applied for in the same year. However, the American opportunity tax credit can be claimed by eligible taxpayers for a period of 4 years while undergoing post-secondary education.

Example of how the American Opportunity Tax Credit works

Lucy studies Chemistry at Stanford University and for the 2018 academic year, she spent the sum of $3,800 on educational materials. Lucy's parents are taxpayers in the United States, and this makes her qualify for the American Opportunity Tax Credit. Lucy then claims the maximum American Opportunity Tax Credit of $2,500 available to her, thus reducing her educational expenses to $1,300 (that is, $3,800- $2,500).

Imagine that Lucy's education materials cost less than the maximum American opportunity tax credit she qualifies for. Let's assume the cost of the educational materials to be $1,000 only. This way, she will still have an extra $1,500 out of which 40% ($600 equivalent) will be refunded to her by the Internal Revenue Service.

Eligibility for the American Opportunity Tax Credit

The Modified Adjusted Gross Income (MAGI) of a taxpayer determines if he or she can qualify for the American opportunity tax credit.

• To file for a full credit, a single individual or couple must have the sum of less than or equal to $80,000, or less than or equal to $160,000, respectively.

• To qualify for a partial credit an individual must have between $80,000-$90,000 MAGI, while a couple should have between $160,000-$180,000

• Furthermore, non-eligibility happens if an individual has a MAGI that is greater than $90,000 or a couple has a MAGI that is greater than $180,000.