American Opportunity Tax Credit: How to Lower Your Tax Bill by Up to $2,500

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The American Opportunity Tax Credit can lower your tax bill if you, your spouse or someone you claim as a dependent spent money on qualified college expenses in the most recent tax year. It’s worth up to $2,500. Even if you don’t owe any tax money, you can get up to $1,000 as a refund if you qualify for the credit.

You’ll have to meet several requirements to get the American Opportunity credit, including earning below a certain income and spending on specific education-related expenses. Here’s how the American Opportunity Tax Credit can help you and your family save on college in 2020.

What is the American Opportunity Tax Credit?
American Opportunity Tax Credit eligibility
How to claim the American Opportunity Tax Credit
How to calculate your American Opportunity Tax Credit
American Opportunity Tax Credit vs. Lifetime Learning Credit

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit is one of several education-related tax breaks from the IRS. It’s a way for families who are paying for college to get some of that money back by paying less tax to the federal government.

If you qualify for the American Opportunity credit, you’ll be able to lower the amount of tax you owe by up to $2,500, depending on how much you paid in eligible education expenses. These expenses can include:

  • Tuition
  • Required fees
  • Books
  • Supplies
  • Course equipment

If you paid for these items with a loan or inheritance, you can still qualify for the credit. But you can’t include items paid for by a Pell Grant, a tax-free scholarship or tax-free employer education reimbursement in your eligible expenses.

A unique feature of the American Opportunity Tax Credit is that it’s refundable, which means the IRS will still refund 40% of your qualified education expenses to you, up to $1,000, even if you don’t owe any tax this year. It’s also available for taxpayers who spent money at trade schools and other eligible educational institutions — not just two- or four-year colleges.

A tax credit is different from a tax deduction. Credits lower your tax bill by the exact amount of the credit for which you qualify, while deductions lower your taxable income. Here’s what that looks like if, for example, it turns out that you owe $3,000 to the IRS:

  • A tax credit of $1,000 will save you $1,000, reducing the amount of tax you owe to $2,000.
  • A tax deduction of $1,000 will lower your taxable income by $1,000. The precise amount of tax you’ll save is based on your tax bracket. If you’re in the 22% tax bracket, for instance, you’ll save 22% of $1,000, or $220. You’ll now owe $2,780 instead of $3,000. But if a tax deduction brings you into a lower tax bracket, you could save more.

How long has the American Opportunity Tax Credit been available?

The American Opportunity Tax Credit was signed into law in 2009, when it replaced and broadened the Hope Scholarship credit. Taxpayers could previously only access the Hope Scholarship credit for two years, while families can now use the American Opportunity credit for four years.

In 2009, American Opportunity Tax Credit recipients got a tax credit that was 75% higher on average than those who used the Hope Scholarship credit or the Lifetime Learning Credit in 2008, according to a report from the U.S. Department of the Treasury.

American Opportunity Tax Credit eligibility

There are lots of eligibility rules governing who can claim the American Opportunity Tax Credit. You must make sure that:

  • You, your spouse or your child is an eligible student
  • The person claiming the credit falls within the income guidelines
  • The expenses you’re claiming are qualified education expenses
  • You’re not also claiming the Lifetime Learning Credit for the same student this tax year

Student eligibility requirements

A student is eligible to claim the American Opportunity Tax Credit if they’ve worked toward a degree or certificate half-time or more for at least one full academic session in the tax year.

Students who’ve already finished four years of higher education as of the beginning of the tax year can’t claim the credit. If they’ve gotten the American Opportunity credit — or the former Hope credit — for a total of four years in the past, they can no longer claim it. Students also can’t have a record of a felony drug conviction as of the end of the tax year.

Income limits

The American Opportunity Tax Credit includes an income ceiling on eligibility, which means taxpayers who earn more than the maximum allowed can’t claim it. The IRS will use your modified adjusted gross income, or MAGI, to determine your eligibility. Here’s how it breaks down:

  • Your MAGI must be less than $90,000 if your filing status is single or $180,000 if it’s married filing jointly
  • If you earn between $80,000 and $90,000 — or between $160,000 and $180,000 if filing jointly — you’ll receive a reduced credit
  • You can claim the full credit if you earn $80,000 or less ($160,000 or less if your filing status is married filing jointly)

Qualified education expenses

You can claim the American Opportunity Tax Credit for expenses paid for tuition, fees (including student activity fees), required books, and education-related equipment and supplies. Living expenses, health care, transportation and insurance aren’t qualified education expenses. A computer the student needs to enroll or attend school qualifies.

Other requirements to note

You can’t claim both the American Opportunity Tax Credit and the Lifetime Learning Credit for the same student during the same tax year. You can claim multiple American Opportunity credits if you’re a parent paying for more than one child’s college education at a time.

You’re ineligible for the credit if your tax filing status is married filing separately. Also, if you’re a student and your parent claims you as a dependent, you can’t get the credit — only your parent can. If you’re a student who’s not claimed as a dependent on a parent’s tax return, you can claim the credit for yourself.

How to claim the American Opportunity Tax Credit

To claim the American Opportunity Tax Credit, you’ll fill out Form 8863 and submit it along with your tax return. In general, you’ll need a Form 1098-T from your school, which states the amount you’ve paid in tuition, to complete Form 8863. If you’re claiming expenses that aren’t reflected on Form 1098-T, you can include them as long as you’re able to “substantiate the payment” of those expenses, according to the IRS.

Form 8863 applies to both the American Opportunity credit and the Lifetime Learning Credit. If you’re planning on claiming the American Opportunity credit only, you can skip portions of Part II on the form. The instructions published by the IRS also include a worksheet for calculating eligible expenses.

How to calculate your American Opportunity Tax Credit

To calculate your potential American Opportunity Tax Credit, first add up your qualified education expenses. You can claim 100% of your first $2,000 in expenses, then 25% of the next $2,000. Your total credit can be no more than $2,500 total per eligible student.

For instance, let’s say you paid $3,000 in tuition and other qualified expenses in 2019. You’ll claim the first $2,000, then calculate 25% of $1,000, which is $250. You can claim the full $2,250 because it’s below the maximum credit of $2,500.

If you paid $10,000 in eligible expenses, you’ll claim $2,000 to start. While 25% of the remaining $8,000 is $2,000, you won’t be able to claim the full amount; instead, you’ll get the maximum $2,500 credit.

American Opportunity Tax Credit vs. Lifetime Learning Credit

The American Opportunity Tax Credit is a valuable tax break for two reasons: It directly lowers your tax bill, and its definition of qualified education expenses is relatively generous compared to other education tax credits and deductions.

Compare it with the Lifetime Learning Credit, for instance. The maximum Lifetime Learning Credit is $2,000, and you generally can’t claim it for books, supplies and equipment like you can for the American Opportunity credit (only for tuition and fees). Plus, the maximum allowable income is lower for the Lifetime Learning Credit, and the credit isn’t refundable. That means that if you don’t owe any tax, you won’t get a refund in the amount of the Lifetime Learning Credit for which you qualify.

Unlike the American Opportunity credit, the Lifetime Learning Credit can be claimed for education expenses that don’t lead to a degree or certificate, though. Eligible students can also claim the credit for more than four years.

There are other education-related tax breaks to consider, too. If you paid interest on student loans during the tax year, you may qualify for the student loan interest deduction, which you can claim separately from the American Opportunity credit. Use our Student Loan Interest Deduction Calculator to estimate out how much student loan interest you might be able to deduct from your taxable income.

Miranda Marquit contributed to this report.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.