# American Opportunity Tax Credit (AOTC): Definition and Benefits

![College students walking on campus](https://www.investopedia.com/thmb/lyBOG_ZPAv4oG3gvfEHoW91QkDg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/AOTC-af112f206ca742fb8ec5c62beb19c1d5-7753555aea8a4617b16bd14938d9d16c.jpg)

*— John Giustina / Getty Images*

> **Definition**
>
> The American Opportunity Tax Credit (AOTC) is a partially refundable credit that offsets certain qualified post-secondary education expenses, up to $2,500.

## What Is the American Opportunity Tax Credit (AOTC)?

The American Opportunity Tax Credit (AOTC) is a partially refundable [tax credit](https://www.investopedia.com/terms/t/taxcredit.asp) that helps offset qualified higher education expenses during the first four years of postsecondary study. The maximum annual credit is $2,500 per eligible student and can be claimed by the student, their parents (if the student is a [dependent](https://www.investopedia.com/terms/d/dependent.asp)), or their spouse.

### Key Takeaways

*   The AOTC offsets up to $2,500 in eligible college expenses per year, per student.
*   It covers tuition, required fees, and course materials, but not room and board, insurance, transportation, or medical expenses.
*   Up to $1,000 of the credit is refundable—even if you owe no taxes.
*   To qualify for the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less (or $160,000 for married couples filing jointly).

## Understanding the American Opportunity Tax Credit (AOTC)

With the AOTC, a household with a qualifying student can receive a maximum $2,500 tax credit per year for the first four years of higher education.

The AOTC helps with educational costs such as tuition and other expenses related to a student’s coursework. Eligible students (or their parents) can claim 100% of the first $2,000 spent on school expenses and 25% of the next $2,000. This comes out to a maximum credit of $2,500.

> **Fast Fact**
>
> The American Opportunity Tax Credit is partially refundable, which means that it could provide a refund even if your tax liability is $0.

In general, tax credits are refundable, [nonrefundable](https://www.investopedia.com/terms/n/nonrefundabletaxcredit.asp), or partially refundable. Up to $1,000 (40%) of the AOTC is refundable, making it a partially refundable tax credit. So, if the credit brings your tax liability to $0, you can receive 40% of your eligible credit (up to $1,000) as a refund.

## AOTC Eligibility Requirements

You must meet specific eligibility requirements to claim the AOTC.

### Who Can Claim the AOTC?

To claim the AOTC on your [tax return](https://www.investopedia.com/terms/t/taxreturn.asp), you must meet all three of these requirements:

*   You pay qualified education expenses for higher education.
*   The education expenses are for an eligible student.
*   The eligible student is either you, your spouse, or a dependent whom you claim on your tax return.  
    

Additionally, you must receive [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) Form 1098-T from an eligible school to claim the credit. Here’s an example of the form.

![Form 1098-T, Tuition Statement 2025](https://www.investopedia.com/thmb/h0qf5g5HLOP1TydFnxkmhtoqDAQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TuitionStatement2025-5a869dc877b640aabbdd25652aab86dd.png)

**

_All pages of Form 1098-T are available [on the IRS website](https://www.irs.gov/pub/irs-pdf/f1098t.pdf)._

### Which Students Qualify for the AOTC?

A student is eligible for the AOTC if they meet certain requirements. Specifically, the student must:

*   Be taking courses toward a degree or some other recognized educational qualification
*   Be enrolled at least half-time for at least one academic period beginning in the [tax year](https://www.investopedia.com/terms/t/taxyear.asp)
*   Not have completed the first four years of higher education at the start of the tax year
*   Not have claimed the AOTC (or the former Hope credit) for more than four tax years
*   Not have a felony drug conviction at the close of the tax year

> **Fast Fact**
>
> Academic periods can be quarters, trimesters, semesters, or summer school sessions. If the school doesn’t have academic terms, you can treat the payment period as an academic period.

### Which Expenses Qualify for the AOTC?

Qualified education expenses include [tuition](https://www.investopedia.com/articles/budgeting-savings/090316/how-get-paid-go-school.asp) and some related costs required to attend an eligible educational institution. An eligible educational institution is any accredited public, nonprofit, or private college, university, vocational school, or other postsecondary educational institution. Related expenses include:

*   Student activity fees paid to the school as a condition of enrollment or attendance
*   Books, supplies, and equipment needed for classes, whether or not you buy them from the school

> **Warning**
>
> Insurance, medical expenses (including student health fees), room and board, transportation, and living expenses do not count as qualified education expenses.

You can pay for qualified education expenses with student loans. However, you can’t claim the credit if you paid for expenses with scholarships, [grants](https://www.investopedia.com/terms/g/grant.asp), employer-provided assistance, or funds from a [529 savings plan](https://www.investopedia.com/terms/1/529plan.asp).

One exception: if some amount of qualified expenses remains after using tax-free educational assistance, those expenses are eligible for the credit.

### What Are the Income Limits for the AOTC?

Those who wish to claim the full credit must have [modified adjusted gross income (MAGI)](https://www.investopedia.com/terms/m/magi.asp) of $80,000 or less ($160,000 if married and filing jointly). The credit begins to phase out above these limits and disappears entirely if your MAGI is above $90,000 ($180,000 if married and filing jointly).

## AOTC vs. Lifetime Learning Credit

Another credit for educational expenses is the [Lifetime Learning Credit (LLC)](https://www.investopedia.com/terms/l/lifelearningcredit.asp). While similar, the LLC and the AOTC differ in several ways.

With the LLC, you can claim up to 20% of the first $10,000 of qualifying expenses ($2,000). The LLC is not limited to students pursuing a degree or studying at least part-time. Instead, it covers a broader group of students, including part-time, full-time, undergraduate, graduate, and courses for skill development. Finally, the LLC is [nonrefundable](https://www.investopedia.com/terms/n/nonrefundabletaxcredit.asp), meaning that once your tax bill hits zero, you won’t receive a refund on any credit balance.

Note: You can't claim both credits for the same student or the same expenses. So if you’re eligible for both the AOTC and the LLC, be sure to assess your individual situation to determine which tax credit provides the greater benefit.

> **Warning**
>
> You can claim the AOTC and the LLC (as well as the deduction for tuition and fees) on the same tax return, but not for the same student or the same qualified expenses.

## Other Tax Breaks for Education

Federal and state governments support higher education expenses through various tax credits, tax deductions, and [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) savings plans. Each of these programs can help lower your income tax liability and make education more affordable. Beyond the AOTC and the LLC, be sure to claim any education-related tax deductions you may be eligible for, including those for:

*   [Tuition and fees](https://www.investopedia.com/form-8917-tuition-and-fees-deduction-definition-5181408)
*   [Student loan interest](https://www.investopedia.com/terms/s/slid.asp)
*   [Qualified education expenses](https://www.investopedia.com/terms/q/qhee.asp)
*   Business deduction for work-related education

Savings plans can also help with higher education expenses. These are tax-advantaged accounts that allow you to save and pay for education expenses. Two popular programs include:

*   Qualified tuition programs (529 plans)
*   [Coverdell Education Savings Account (ESA)](https://www.investopedia.com/terms/c/coverdellesa.asp)

> **Tip**
>
> Thanks to the Tax Cuts and Jobs Act, you can now use up to $10,000 of 529 plan distributions to pay for K–12 costs per beneficiary each year. Previously, you could use the funds only for college and other postsecondary education expenses.

## AOTC Example

Rosa is a full-time undergraduate college student at a four-year institution. She also works for a law firm. Her parents have a substantial [529 savings account](https://www.investopedia.com/best-529-plans-5070533) in place, but it doesn’t cover all of Rosa’s expenses. Rosa also has a student loan with deferred payments and interest until after graduation.

Rosa and her family pay her tuition with student loans and use funds from a 529 plan to cover room and board. Rosa receives her annual 1098-T statement and, since she is working, she plans to take the AOTC herself. She is eligible for both the AOTC and the LLC, but she chooses the AOTC because it provides a larger credit and is partially refundable.

Rosa paid her tuition with a student loan, which is allowable for the AOTC. The AOTC helps alleviate any tax that she owes, and she also gets a partial refund. Rosa doesn’t owe anything on her loans until after she graduates. The money distributed from the 529 was tax-free because it was used for room and board, which is a qualified 529 expense.

## How Do I Claim the American Opportunity Tax Credit?

To claim the AOTC, complete Form 8863 and submit it with your [Form 1040](https://www.investopedia.com/terms/1/1040.asp) or [1040-SR](https://www.investopedia.com/taxes/seniors-get-new-simplified-tax-form/) when filing your annual income tax return. Enter the nonrefundable part of the credit on Schedule 3 of your 1040 or 1040-SR, line 3. The refundable portion of the credit goes on line 29 of the 1040 or 1040-SR.

## Can I Claim the AOTC and the Lifetime Learning Credit?

Though you can claim the AOTC and the LLC on the same tax return, you can’t claim both credits for the same student or the same expenses during a single tax year.

## Can I Claim the AOTC If I Get a Grant?

Yes. However, you need to subtract the grant amount from your qualified education expenses before claiming the tax credit. So, if you have $5,000 in costs and a $4,000 grant, you would be able to claim $1,000 of qualified education expenses with the AOTC. For the purposes of the AOTC, grants include:

*   Tax-free parts of scholarships and fellowships
*   Pell Grants and other need-based education grants
*   Employer-provided assistance
*   Veterans’ educational assistance
*   Any other tax-free payments that you receive for educational aid (excluding gifts and inheritances)

## The Bottom Line

The AOTC is a partially refundable tax credit that can offset certain qualified education expenses of postsecondary students. The student (or a spouse or someone claiming the student as a dependent) can claim up to $2,500. If the credit takes your bill down to zero, you can receive a refund of up to $1,000 (40% of your eligible credit).

> **Article Sources**
>
> 1.  Internal Revenue Service. “[American Opportunity Tax Credit](https://www.irs.gov/credits-deductions/individuals/aotc).”
>     
> 2.  Internal Revenue Service. "[Education Credits--AOTC and LLC](https://www.irs.gov/credits-deductions/individuals/education-credits-aotc-llc)."
>     
> 3.  Internal Revenue Service. "[What Is an Eligible Educational Institution?](https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eligible-educational-inst)"
>     
> 4.  Internal Revenue Service. “[Publication 970, Tax Benefits for Education](https://www.irs.gov/publications/p970)."
>     
> 5.  Internal Revenue Service. “[Education Benefits — No Double Benefits Allowed](https://www.irs.gov/credits-deductions/individuals/education-benefits-no-double-benefits-allowed).”
>     
> 6.  Internal Revenue Service. "[Compare Education Credits](https://www.eitc.irs.gov/other-refundable-credits-toolkit/compare-education-credits/compare-education-credits)."
>     
> 7.  Internal Revenue Service. “[Lifetime Learning Credit](https://www.irs.gov/credits-deductions/individuals/llc).”
>     
> 8.  Internal Revenue Service. “[Tax Benefits for Education: Information Center](https://www.irs.gov/newsroom/tax-benefits-for-education-information-center).”