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What is the American Opportunity Tax Credit?

Learn more about this valuable tax credit for college students

The American Opportunity Tax Credit (AOTC) is a system developed by the government to help students pay for their way in college. When established, the AOTC was supposed to expire by the year 2012 but recent developments allowed it to extend to the year 2017.

How It Works

AOTC is fairly simple with its policies. Individuals with a modified adjusted gross income of $80,000 or less enjoy a full credit on their taxes. The same goes for couples filing under the same return with a gross income of $160,000 or less. The maximum annual credit is calculated at $2,500 per year, per student.

Student Eligibility

Students who can apply for AOTC must meet the following requirements:

• He or she must be enrolled in any institution offering a post-secondary credential recognized by the government
• Did not finish the 4 years of post-secondary education as of the start of the year for tax credits
• Student must be carrying at least 50% of the typical full-time workload of the degree for at least one academic period, and
• No convictions relating to a felony drug offense

Hope and AOTC

If you remember a similar policy under a different name, then chances are you are thinking of Hope. The latter is actually the basis of AOTC with AOTC expanded to provide more coverage for American citizens. Today, the tax credits you get for AOTC are bigger than Hope and Lifetime Learning Credits, all sponsored by the government. Aside from the obvious difference between the overall amounts credited, AOTC is also available for individuals who do not owe any tax to the government. This paves the way for a refundable amount of 40% or $1,000 – whichever is lower.


AOTC is fairly comprehensive when providing tax credits on recipients. For one thing, it now covers all four years of a post-graduate degree instead of just the first 2 years of schooling. Qualifying expenses are fairly extensive with recipients able to claim required course materials to the list of their expenditure. Unlike the HOPE policy which requires that the money is directly paid to the university, AOTC provides room for the purchase of materials used in daily classes.

Of course, to apply for the credit, your claim must also meet the following requirements:

• During the creditable year, the expenses paid must be for an academic period that started within the same year that the tax is paid, or;
• The academic period must start within the first three months of the next taxable year
• The educational institution offering the post-secondary course must be eligible as per tax standards.

Note that some expenditure is not accepted as part of the AOTC coverage. Following are some of the expenses that every student will have to pay out of pocket:

• Insurance
• Medical expenses
• Room and board
• Transportation
• Student fees used for education benefits or other tax deductions
• Any type of student fee unless it is required for enrollment
• Expenses with a tax-free educational assistance

You can claim AOTC through the Form 863 while attaching it to 1040A or Form 1040. Note that claiming AOTC for a taxable year means that you cannot claim the Tuition and Fees tax deduction as well.

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