American Opportunity Tax Credit: What is it & How does it Work?

May 18, 2025

Paying for college or other higher education can be tough. If you are paying for it, you might find some help at tax time. One of the most valuable tools the IRS offers to help cover the cost of postsecondary education is the American Opportunity Tax Credit (AOTC). This credit can put real money back in your pocket and ease the financial pressure during those all-important early college years.

Here’s what you need to know about how it works, who qualifies, and how to claim it.

What Is the American Opportunity Tax Credit?

The American Opportunity Tax Credit is a federal tax credit. It helps cover the costs of higher education. This credit is for students in their first four years of college or other eligible programs. It’s not a deduction—it’s a credit, meaning it directly reduces your tax bill, dollar-for-dollar.

And it gets better: even if the credit lowers your tax bill to zero, you might still get some money back as a refund.

How Much Is the Credit Worth?

The maximum value of the AOTC is $2,500 per eligible student, per year. Here's how it breaks down:

●      You get 100% of the first $2,000 you spend on qualified education expenses

●      Plus, 25% of the next $2,000 in those same types of expenses

That means if you spend $4,000 or more on eligible costs, you’ll qualify for the full $2,500.

Even better? Up to $1,000 of that credit is refundable, which means you could get money back even if you don’t owe any taxes.

Who Can Claim the Credit?

To qualify, you must pay for qualified education expenses for an eligible student. This student can be you, your spouse, or a dependent you claim on your tax return.

Student eligibility requirements include:

●      Enrolled in a degree or recognized credential program

●      Enrolled at least half-time for one or more academic periods during the year

●      In their first four years of higher education

●      No felony drug convictions

●      Not having claimed the AOTC (or its predecessor, the Hope Credit) more than four times

Income limits also apply. To receive the full credit in 2025:

●      Single filers must have a Modified Adjusted Gross Income (MAGI) of $80,000 or less

●      Married couples filing jointly must have MAGI of $160,000 or less

Partial credits may be available for single filers earning up to $90,000, or joint filers up to $180,000. Those above these thresholds—or those who are married filing separately—aren’t eligible.

What Expenses Count Toward the AOTC?

Only certain costs qualify for this credit. These include:

●      Tuition and required enrollment fees

●      Course materials (such as books or supplies) that are needed for coursework, even if not purchased through the school

Room and board, transportation, and optional fees do not count. Keep your receipts and records organized. This way, you can claim only eligible expenses.

How Does It Compare to the Lifetime Learning Credit?

The Lifetime Learning Credit (LLC) is another education-related tax benefit, but it differs in key ways:

●      It covers all years of postsecondary education, including graduate and professional degree courses

●      It maxes out at $2,000 per tax return (not per student)

●      There’s no limit to how many years it can be claimed

However, you can’t double-dip: each student can only claim one education credit per year. If you pay for more than one student, you can claim AOTC for one and LLC for another. This is true if each student meets the criteria.

How to Claim the AOTC

To take advantage of the credit, you’ll need to fill out IRS Form 8863 and attach it to your annual tax return. To complete this form, you’ll need information from Form 1098-T, a tuition statement your school should send you.

Make sure the institution’s Employer Identification Number (EIN) is included—this is required when filing for the credit.

Other Ways to Cut Higher Ed Costs

In addition to the AOTC, you might explore:

●      Student loan interest deductions

●      Tuition and fees deductions (where available)

●      Tax-advantaged savings plans, like 529 plans or Coverdell ESAs, help you save money for education. They allow tax-free growth and withdrawals if you use the money for qualified education expenses.

Bottom Line

The American Opportunity Tax Credit can help reduce college costs if you qualify. With up to $2,500 per student available, it’s one of the most generous education tax credits out there. Just be sure to check the requirements, keep good records, and file the right forms to make the most of what’s available.

If you have questions about claiming the credit or how it fits into your tax plan, reach out to a tax professional. They can help guide you.

Sources:

https://www.fidelity.com/learning-center/personal-finance/american-opportunity-credit

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.