American Opportunity Tax Credit (AOTC)

Definition: The American Opportunity Tax Credit (AOTC) is defined as a refundable tax credit available to eligible students, seekers, and dependents. All individuals age 18–24 who attend postsecondary schools in the United States and meet income and identity requirements can receive an AOTC credit back from the Internal Revenue Service (IRS) when they file their taxes.

The AOTC is provided by the IRS and is designed to provide a tax credit to certain undergraduate and graduate students who have been discouraged from getting an education by the cost of tuition, required fees, room and board, and other related expenses. Qualified expenses include textbooks, equipment, supplies, computers, Internet access, and additional necessary student living costs.

The AOTC is a tax refund offsets given to one family once a year by the IRS. It was created in the year 2000 to help low-income families afford a college education. Since then, the credit has been expanded to include more families and increased millions of dollars in taxes paid by successful high net worth individuals. The AOTC can be used for any qualified higher education expenses, including tuition, books, and supplies. The $2,500 limit per family is still the largest amount that can be received through credit, but it has been reduced in recent years due to inflation.

The American Opportunity Tax Credit is the largest refundable tax credit in the United States. It provides eligible individuals with a refundable tax credit equal to 50% of the amount they paid more than the applicable tax liability for the current tax filing cycle. Qualified taxpayers can receive up to $2,000 per person or $5,000 per family, depending on their income. The AOTC can also be phased out completely for those who have incomes below $100,000 for married couples filing jointly or $200,000 for individuals filing separately. In 2015, over 23 million people took advantage of this important tax credit.

To be eligible for this credit:

  • One must be enrolled for a degree program in college or university and enrolled in courses to receive a degree.
  • If you are a college student and have not been convicted of a drug offense
  • If you haven’t applied for AOTC before.

Before AOTC came into existence, two postsecondary education tax credits were the Lifetime Learning Credit and the Hope Credit. AOTC later replaced Hope Credit.

AOTC vs. LLP

The AOTC and the LLC are both grants that provide monetary support to help pay for qualified education expenses. The amount of the funding supplied varies based on income. The AOTC offers 20% of the standard tuition and fees at eligible institutions; the LLP provides a 20% reduction in tuition and related charges. Students should note that the income limits for both programs are very high, so it is important to consider how much you would be paying if you had not taken out the loan. In addition, there are additional eligibility requirements that must be fulfilled to be eligible for either program.

The AOTC and the LLC are penalties that the IRS assesses if you fail to file or pay a tax you owe, even if you have satisfied your obligation through other methods. You meet the requirements for the credit if either the AOTC or the LLC reduced your tax liability for the year by more than zero.