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What is the American Opportunity Tax Credit?

Updated on October 30, 2015

If there is one gigantic issue in the US today, it has to be the price of getting a college education. It is astronomical and most college students not only have to save up for years to actually go to college but they also have to work hard during their actual college years just to be able to make it. Then, once they graduate, they also have to work to pay off thousands of dollars in debt. Yes, college education is expensive but necessary and that is why so many students bury themselves in debt.

Some people might complain that the government isn’t doing much to help out students but this is where the American opportunity tax credit comes into play. Again, some of you may balk at the word “tax” since that usually means more money out of your pockets when you can use that money to pay for college but in this instance, it is actually a good thing. For college students who are looking for a way to make college a bit more affordable, read on below to find out exactly what this American Opportunity Tax credit can do for you.

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit is the name given to a refundable tax credit scheme that is geared specifically for undergraduates in college who are struggling with their education expenses. The credit isn’t too large at first since it provides just up to $2,500 in tax credits on the first $4000 that is to be spent in qualifying education payments. This is indeed welcome news for all undergrads but one thing you need to know about this scheme is that it has a limited run. It started back in the year 2009 and will end in 2017 which is just a couple of years away. However, it might be extended but that is only if congress decides to do so.

More Details on the American Opportunity Tax Credit

As mentioned previously, the American Opportunity Tax Credit gives up to $2,500 on the first $4000 of qualifying educational expenses. Qualifying educational expenses includes not just tuition but also course materials such as books since they also tend to cost a pretty penny. This tax credit isn’t just for the first year in college but applies to all four years of a typical college course for undergraduates. However, the credit does get “phased out” or gradually reduced for students who have modified adjusted gross income that is anywhere from $80,000 to $90,000. For joint filers, the amount is from $160,000 to $180,000 and it is not available for people who have incomes beyond those phased out range numbers. However, the phased out range applies only to the years 2014 to 2015. Another detail you need to be aware of is that the credit is refundable for up to 40%. This means that it can generate a fund that is bigger than the amounts of payments that you have made.

Guide to Calculating the American Opportunity Tax Credit Amount

For college undergrads or those who are just about to start college, this is a golden opportunity to find out exactly how much you can get. Have a look at some important numbers below:

  • Eligible students can get 100% of the very first $2000 in their qualifying education expenses.
  • They also get another 20% of the next $2000 in qualifying expenses.

This all adds up to the $2,500 for $4000 worth of qualifying expenses for undergrads. Take note that the amount that is refundable for the American Opportunity Tax bottoms out at 40% which is still nothing to scoff at. This means that students can get up to $1000 of their American Opportunity credit refunded even if they have zero tax liability. Looking at these numbers, it is easy to see that this scheme is more valuable when compared to the Lifetime learning credit since the latter is non-refundable.

Qualifying for the American Opportunity Tax Credit

For those who are wondering who can qualify for this credit, it is available to people who want to claim it for themselves or for their dependents, provided that the students are enrolled in college or university at least half-time or in other post-secondary educational institutions. Students and individuals who qualify for this can use it for the first four years of their post-secondary education (first four years of education after graduating from high school). Students who have already completed four years of post-secondary school but want to go for another four years in college are not eligible for this scheme. Students who have already claimed the credit four times in their previous file returns are not eligible for it.

You might have heard of the term “qualifying expenses” for the American Opportunity Tax Credit. But what is it exactly? This is a term that talks about tuition as well as other related course materials. Contrasting it to just “qualifying expenses,” you can really see the difference because in this instance it means that it is restricted only to the tuition for fees and deduction of fees. When it comes to this scheme, it means that the following are included in the qualifying expenses:

  • Textbooks and workbooks
  • Supplies for lab courses
  • Software
  • Other class materials that qualify for this tax credit

As you can see, this tax credit scheme for students is more comprehensive especially when compared to the Lifetime Learning Scheme.

Comparing and Contrasting the American Opportunity Tax Credit to Other Education Tax Breaks

This is a great tax break for undergrads but the fact here is that it is hardly the first tax break introduced by the government to help students out. There are many others out there and it pays to see how they all compare and contrast against each other. Have a look below at some comparisons.

  • American Opportunity Tax Credit – This tax break scheme is available only for the first four years of post-secondary education and can be refunded but only partially. In order to qualify for this, a student has be enrolled in a college or university at least half-time. Seeing that this is a refundable credit, it means that it can help to offset the self-employment tax and alternative minimum tax that students pay. This covers the cost of tuition along with other qualifying course materials.

  • Lifetime Learning Credit – This educational tax break is available to any student who wants to go for post-secondary, undergraduate, and graduate school that goes beyond the 4-year mark. It is also offered for any course load which means that a student does not need to be enrolled half-time to be considered eligible. However, this credit is non-refundable and only covers tuition fees.

Students can qualify for and use both of these tax breaks introduced especially for students. However, they have to know that they cannot use both, at least not at the same time and not in the same tax year for just one student. This also means that they need to forego deducting the interest for tuition and student loans if they go for either one of these tax break schemes. One question that is most often asked about this tax credit scheme is if it is available for those undergraduates who are given the Pell Grant. Now, the Pell Grant is a post-secondary grant given by the Federal Government and it is not a tax break so there is no conflict with the American Opportunity Tax Credit, and therefore, students who get the Pell Grant can still qualify for this tax break scheme.

Which tax credit scheme works better for you?

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Submit a Comment

  • kgmonline profile imageAUTHOR

    Geri MIleff 

    3 years ago from Czech Republic

    Well, that's pretty tough too, @CASE1WORKER. There seems to be little that can be controlled by people where loans for necessities are concerned. :P

  • CASE1WORKER profile image


    3 years ago from UNITED KINGDOM

    And we in the UK think it tough when we get a government loan which is paid back in relation to our earnings and is wiped clean after 30 years!


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