American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC), also known as the Hope Scholarship Tax Credit, provides a federal income tax credit based on amounts paid to an eligible educational institution for college tuition and certain related expenses required as a condition of enrollment or attendance at the educational institution, such as books, supplies, equipment, and fees. Costs associated with sports, games, hobbies and noncredit courses are excluded unless specifically part of the student’s degree program.

Amount of Tax Credit

Taxpayers can receive up to $2,500 in tax credits on their federal income tax return, based on 100 percent of the first $2,000 and 25 percent of the second $2,000 spent on college tuition, required fees and course materials (such as textbooks, supplies and equipment).

Forty percent (i.e., at most $1,000) of the student tax credit is refundable, provided that the taxpayer cannot be claimed as an exemption on someone else’s federal income tax return. Otherwise, the taxpayer must have a tax liability to be offset by the non-refundable portion of the tax credit.

Coordination Restrictions

Taxpayers cannot double dip. Each dollar of qualified higher education expense can be used to justify only one tax benefit. For example, the same tuition expenses cannot be used to justify both a tax-free distribution from a 529 college savings plan and a tax credit. Likewise, the coordination restrictions mean that tax-free scholarship money cannot be used to pay for expenses for which the taxpayer is also claiming the American Opportunity Tax Credit.

Tip: Taxpayers should carve out up to $4,000 in tuition and textbook expenses that will be paid for in cash or loans in order to qualify for the maximum tax credit.

The AOTC generally has a greater financial value than other education tax benefits. It is worth more than a tax-free distribution from a 529 college savings plan, even if one considers the 10 percent tax penalty for a non-qualified distribution, for taxpayers with income below the income phaseouts. Accordingly, it may be financially beneficial for families to prioritize the AOTC ahead of other education tax benefits even if this forces the family to take a non-qualified distribution from a college savings plan later.

The AOTC is not subject to the Alternative Minimum Tax (AMT).

Eligibility

To be eligible for the American Opportunity Tax Credit, the student must be enrolled on at least a half-time basis at a college or university that is eligible for Title IV federal student aid. The student must also be seeking a degree, certificate or other recognized post-secondary educational credential. Students who have been convicted of a felony drug offense are ineligible.

The AOTC is limited to the first four years of postsecondary education and for at most four tax years per student. Expenses paid during the first three months of the next tax year may be counted as though paid during the current tax year.

To claim the AOTC, the taxpayer must be able to claim an exemption for the student on the taxpayer’s federal income tax return. The tax credit is claimed per student, not per taxpayer, so taxpayers may claim a tax credit for each dependent who is enrolled in college. Expenses paid by a dependent are treated as though they were paid by the taxpayer. Students who could have been claimed as an exemption on someone else’s federal income tax return may claim the AOTC, but are not eligible for partial refundability. For example, suppose that a student’s parents have income above the income phaseouts. The parents could choose to have the student claim the AOTC on the student’s federal income tax return, but only as a nonrefundable tax credit. A nonrefundable tax credit may reduce the taxpayer’s tax liability, but cannot be refunded to the taxpayer if the tax credits exceed the tax liability.

Income Phaseouts

The tax credit phases out for taxpayers who file federal income tax returns with Adjusted Gross Income (AGI) between $80,000 and $90,000 (single) and between $160,000 and $180,000 (married filing jointly). Married taxpayers who file separate returns are ineligible for the tax credit. The income phaseouts are not adjusted annually for inflation.

Expiration

The American Opportunity Tax Credit (AOTC) was enacted as a temporary enhancement of the Hope Scholarship Tax Credit. The AOTC is currently scheduled to expire at the end of 2017, when the terms of the tax credit will revert to the terms of the Hope Scholarship tax credit.

The primary differences between the AOTC and the Hope Scholarship tax credit are illustrated in this table:

Characteristic Hope Scholarship Tax Credit American Opportunity Tax Credit
Duration First 2 years of postsecondary education First 4 years of postsecondary education
Refundability Non-refundable Partially refundable (40%, maximum of $1,000)
Eligible Expenses Tuition and required fees Tuition, fees, and course materials (such as textbooks, supplies and equipment)
Alternative Minimum Tax (AMT) Subject to AMT Exempt from AMT
Amount $1,800 in 2008 (100% of first $1,200 and 50% of second $1,200). The amount is adjusted annually for CPI-U (Consumer Price Index for all urban consumers) and rounded to nearest $100. By the time the AOTC expires, the Hope Scholarship tax credit will probably reach $2,100. $2,500 (100% of first $2,000 and 25% of second $2,000). The amount is not adjusted for inflation.
Income Phaseouts 2014 Tax Year
$54,000 to $64,000 (single)
$108,000 to $128,000 (joint)

2015 Tax Year
$55,000 to $65,000 (single)
$110,000 to $130,000 (joint)
2014 Tax Year
$80,000 to $90,000 (single)
$160,000 to $180,000 (joint)

2015 Tax Year
$80,000 to $90,000 (single)
$160,000 to $180,000 (joint)

References

Publications

Forms

  • IRS Form 8863, Education Credits
  • Tuition Statement (IRS Form 1098-Tinstructions). This form is used by colleges and universities to report tuition and other required expenses paid by the taxpayer. A copy is sent to taxpayers by January 31. The information on the form can be used to complete IRS Form 8863.

Current Law

Legislative History

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