Definition
The American Opportunity Tax Credit (AOTC) is a tax credit for eligible education expenses for the first four years of higher education. It was a modification of the former Hope Scholarship Tax Credit, designed to make college more affordable. Parents of dependent students and students themselves can claim up to $2,500 per eligible student on their federal tax returns. This credit covers 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000. Additionally, up to 40% of the credit (up to $1,000) is refundable, meaning taxpayers can receive this portion even if they owe no federal income tax.
Examples
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Paul is in his third year at a qualifying university: He pays $3,000 for tuition, $800 for books, and $200 for other required course materials. Paul can claim the first $2,000 in full and 25% of the remaining $2,000, totaling $2,500.
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Lisa’s parents are paying for her freshman year of college: The total qualified education expenses are $4,500. They can claim the maximum AOTC credit of $2,500, of which $1,000 is potentially refundable if they owe little or no federal income tax.
Frequently Asked Questions (FAQs)
Who is eligible for the AOTC?
Students enrolled in an eligible degree or certificate program who are at least half-time in one academic period during the year are eligible. Gross income limitations apply, with phase-out beginning at $80,000 for single filers and $160,000 for joint filers.
What expenses are covered?
The AOTC covers tuition, fees, and course materials required for enrollment or attendance. This includes books and supplies, even if not directly purchased from the institution.
Can AOTC be claimed for all four years of college?
Yes, the AOTC can be claimed for each of the first four years of postsecondary education, including each academic year of an undergraduate degree program.
Is the AOTC refundable?
Yes, up to 40% of the AOTC is refundable. This means eligible taxpayers can receive up to $1,000 even if they owe no federal income tax.
Can I claim AOTC if I am pursuing a graduate degree?
No, the AOTC is limited to the first four years of postsecondary education. Graduate students may consider other credits, such as the Lifetime Learning Credit.
Related Terms
- Lifetime Learning Credit (LLC): A credit for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution, with no limit on the number of years it can be claimed.
- Qualified Education Expenses: These include tuition, fees, books, supplies, and equipment required for courses at eligible educational institutions.
- Hope Scholarship Tax Credit: A precursor to the AOTC, this provided tax credits for the first two years of college, with a maximum credit of $1,500 per year.
Online References
Suggested Books for Further Studies
- “How to Get Your Child into A College and Pay for It With Limited Income” by Deborah L. Davis
- “Paying for College Without Going Broke, 2023 Edition” by The Princeton Review
- “The Scholarship Book: The Complete Guide to Private-Sector Scholarships, Grants, and Loans for Undergraduates” by Daniel J. Cassidy
Fundamentals of American Opportunity Tax Credit: Taxation Basics Quiz
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