Think of the American Opportunity Tax Credit (AOTC) as a little “thank you” from the government for investing in education. It helps students (or their parents) save on taxes by covering some college costs.
Here’s how it works:
- You can get up to $2,500 per year per eligible student.
- It’s only for the first 4 years of college (undergrad only).
- It covers 100% of the first $2,000 spent on tuition, fees, and books, plus 25% of the next $2,000—adding up to $2,500 total.
- 40% of the credit ($1,000) is refundable—which means even if you don’t owe taxes, you could still get money back!
WHO QUALIFIES FOR THE AOTC?
To claim this credit, you or your dependent must:
- Be enrolled at least half-time in a program that leads to a degree or certificate.
- Not have already completed four years of college.
- Not have claimed the credit more than four times.
- Have a Modified Adjusted Gross Income (MAGI) of less than $80,000 (single) or $160,000 (married filing jointly).
If you make more than these limits, the credit phases out until it disappears completely.
Here are some COMMON MISTAKES THAT MAKE PEOPLE MISS OUT
Now, let’s talk about some common mistakes that cause people to miss out on this credit (or mess up their tax return).
Mistake #1: Forgetting to Claim It
Most people don’t even know this credit exists! And many colleges don’t send out Form 1098-T (which lists tuition payments), so taxpayers assume they don’t qualify.
How to Fix It: Log into your college or university’s website, find the tax documents section, and download Form 1098-T. This form is key to claiming the credit!
Mistake #2: Forgetting to Include Books & Fees
The AOTC isn’t just for tuition! If you paid for:
- Required textbooks
- Course-related software
- Mandatory fees
You can include those costs to maximize your credit!
Mistake #3: Dependent Students Filing Incorrectly
If a student is claimed as a dependent, they CANNOT claim the credit on their own return!
Parents, make sure you claim your child as a dependent AND claim the AOTC on your tax return. If the student accidentally claims themselves, they’ll lose the credit entirely.
Pro Tip: If you’re not sure who should claim the credit, try preparing the tax return two ways:
- The parent claims the student and the credit.
- The student claims themselves and the credit.
Compare the results and see which way saves the most money!
WHAT IF YOU HAVE SCHOLARSHIPS?
Scholarships are great, but if they cover more than your tuition, you might run into some tax issues.
What happens if scholarships are higher than tuition?
Any extra scholarship money (beyond tuition, fees, and books) becomes taxable income—meaning it needs to be reported on your tax return.
This amount is usually reported on Form 1040, under “Other Income” (Schedule 1, Line 8).
How does this affect the AOTC?
If your scholarship covers all tuition and fees, you may not qualify for the AOTC since you didn’t have any out-of-pocket expenses. If you still paid for some education costs yourself, you can claim that portion for the credit!
Strategy to Maximize the AOTC:
- Some scholarships allow funds to be used for living expenses (like rent and food).
- If the scholarship terms allow, you might be able to allocate part of it to living expenses instead of tuition.
- This could make more of your tuition eligible for the AOTC while shifting some of your scholarship money into taxable income—which might be a better deal overall.
Example:
Let’s say you get a $10,000 scholarship that covers $8,000 tuition and $2,000 for housing.
If allowed by the scholarship, you could apply $2,000 to rent instead of tuition. This would free up $2,000 in tuition expenses to qualify for the AOTC. Even though you’d pay a little tax on the scholarship money, you could get way more back through the tax credit.
HOW TO CLAIM THE CREDIT
Alright, now that you know how it works and what to avoid, here’s how to actually claim it on your tax return:
- Step 1: Download Form 1098-T from your college/university’s website (or ask them for it).
- Step 2: Fill out IRS Form 8863 (Education Credits)—this calculates your AOTC.
- Step 3: Attach Form 8863 to your Form 1040 when filing your taxes.
- Step 4: If you use tax software, look for the Education Credits section, and it will guide you!
FINAL THOUGHTS
This is one of the most commonly missed tax credits, so don’t let that be you!
- Download your Form 1098-T (or remind your child to do it).
- Include books and required materials—not just tuition.
- Make sure the right person is claiming the credit.
And if you’re not sure what to do, talk to a tax professional—this credit is too valuable to miss out on!