What is the American Opportunity Tax Credit?

There are significant differences between individual and corporate taxes, but the one commonality is the importance of tax planning. Whether you're dealing with your personal or business taxes, you should plan ahead to minimize your tax liability.

Businesses can reduce their taxable income by claiming deductions for a wide range of business expenses from paperclips to employee reimbursement plans. On top of that, they can directly reduce their tax bill with business-specific credits such as the Employee Retention Credit for businesses that kept employees on payroll during COVID.

Individuals can also save money by claiming deductions and credits, but they are dealing with a significantly different list of options. For most individual taxpayers, the most significant tax savings that they can claim are credits and deductions related to educational expenses. To help you out, this post looks at one of the most valuable education credits — the American Opportunity Tax Credit (AOTC). 

So, what is the American Opportunity Tax Credit? Let's dig into the specifics.

AOTC Eligibility Requirements

To be eligible for the American Opportunity Tax Credit, you must pay qualifying educational expenses for a qualifying student. Students can claim this credit, and it's especially attractive for older non-traditional students who are pursuing a college degree. However, parents can also claim this credit for dependents claimed on their return, and this tends to be the case when you're dealing with younger college students who don't work full time.

Here are the eligibility criteria:

• The student must be in a degree-based program.
• The student must not have a four-year degree yet.
• The student must be enrolled at least half time.
• The student must not have a felony drug conviction.

On top of that, you can only claim the credit four times per student. To give you an example, say that someone's parents claimed this credit four times, but their child never graduated. Several years later, the student goes back to college as an adult — at that point, they cannot claim the credit.

Although they meet all of the other eligibility criteria, the credit has already been claimed four times on their behalf so they are no longer eligible. However, if their parents had only claimed the credit three times, they would be able to claim the credit for one year (as long as they met the other criteria).

Now, say those same parents send another child to college. As long as that child meets the criteria, the parents can claim the credit. The four-year limit applies per student, not per taxpayer. Note that these examples refer to parents, but a spouse or any third-party that pays expenses on behalf of a student can claim this credit.

AOTC Qualifying Expenses