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AOTC – American Opportunity Tax Credit

Last Update Date : April 30, 2019
Estimated Read Time: 5 min

The Tax Cuts & Jobs Act made changes in the tax laws related to several tax credits. However, it has made no changes to the AOTC, one of the most profitable and difficult to qualify education credit. Hence, you are lucky if you are currently a college student as you will get some relief from the burden of paying taxes. Let’s take a glance and learn more about this popular education credit in this comprehensive guide by H&R Block, India.

Eligibility Criteria

The eligibility criteria in order to claim the American Opportunity Tax Credit are as follows:

  1. You must pay for qualified educational expenses of higher education.
  2. You must pay the education expenses for an eligible Student.
  3. The eligible student must be either yourself, your spouse, or a dependent for whom you are claiming an exemption on your tax return.

Eligible Student

For being eligible for the American Opportunity Tax Credit, a student must meet the below requirements:

  1. A student must be pursuing a degree, certificate or other recognized education credential.
  2. A student must not be a person declared guilty of a felony drug crime by a court of law at the end of the tax year.
  3. A student must be enrolled at least half-time for at least one academic period beginning in the tax year.
  4. A student must not have finished the first four years of his higher education at the beginning of the tax year.

Not Eligible to Claim

If you fall under any of the below categories, you are not eligible to claim for the American Opportunity Tax Credit:

  1. If You are a Non-Resident Alien.
  2. You are a Student on F1 OPT (Optional practical training)/CPT (curriculum practical training).
  3. You are filing as Married Filing Separately.
  4. If someone claimed you as a dependent on his tax return.
  5. You failed to get Social Security Number (SSN) or Taxpayer Identification Number (TIN) before the tax filing due date.

Eligible Expenses

The eligible expenses for the AOTC are as follows:

  1. Tuition fees
  2. Any student activity fees which is paid directly to the school
  3. Any course related expenses paid to the Institute for enrollment or attendance which includes-
    • Books
    • Supplies
    • Equipment

Ineligible Expenses

There are expenses that are not eligible to be claimed under the American Opportunity Tax Credit. They are as follows:

  1. Expenses for room and boarding
  2. The transportation expenses
  3. Insurance expenses
  4. Medical expenses
  5. Students fees unless it is a condition for enrollment or attendance purpose.
  6. If the same expenses are paid with tax-free educational assistance.
  7. If same expenses which are used for any other tax deduction, credit or educational purpose.
  8. If amounts are paid for hobbies, sports or games.

Eligible Institution

An eligible institution must be any of the following:

  1. Any accredited college
  2. Any University
  3. Post-secondary vocational school

Conditions

The expenses paid during the tax year must be related to:

  1. In case of an academic period that begins in the same taxable year, or
  2. In case of an academic period that begins in the first three months of the preceding taxable year.

Limits on Modified Adjusted Gross Income (MAGI)

In case the taxpayer’s MAGI exceeds the below threshold, he is not liable to claim for AOTC:

  1. In case of filing as Married Filing Jointly: $180,000
  2. In case of filing as Single, Head of Household or Qualifying Widower: $90,000.

How to Claim?

AOTC can be claimed on Form 8863 which is to be attached with Form 1040.

Forms Used

The below-mentioned forms are used for claiming benefits of AOTC:

  1. Form 1098-T: This form is your tuition statement which your college needs to provide you. It includes information which you’ll require to report at the time of claiming education credits like tuition fees paid, related expenses, any scholarships or grants you have received, and also any adjustments from last year.
  2. Form 8863: If you want to see whether you qualify for an education credit, you should use this form.
  3. Form W-2: This form is given by your employer which contains the information on any taxes withheld from your paycheck.

The Process of Claiming

The process of claiming AOTC are as follows:

  1. In order to help you figure your American Opportunity Tax Credit, the enrolled student may receive Form 1098-T which is available to them from an eligible educational institution by January 31, 2019.
  2. An institution has the option to choose to report for qualified education expenses either payments received in box 1 or amounts billed in box 2.
  3. It is possible that on Form 1098-T the amounts in boxes 1 and 2 might not be similar to what you paid.
  4. At the time of figuring the credit, you should use only the amounts you paid or the amounts which are deemed to have paid for qualified expenses.
  5. Form 1098-T should provide other information for that institution, like adjustments made for prior years, amount of scholarships or grants, reimbursements or refunds, and was the student enrolled at least half-time or was a graduate student.

Calculation of Credit

Each eligible student is liable for a maximum annual credit up to $2,500. Your liable credit is 100% of the first $2,000 you have paid for qualified education expenses of each eligible student plus 25% of these expenses on the next $2,000. 40% of this credit amount is refundable hence, even if your tax liability goes down to zero you will still get 40% of $2,500 that is $1,000.

Exceptions to the Refund

You will not get any refund in case you fall under any of the following:

  1. In case :
    • You were below 18 at the end of the tax year 2018, or
    • You were of age 18 at the end of the tax year 2018 and the income you earned was less than one-half of your support, or
    • You are above 18 and below 24 at the end of the tax year and a full-time student and your earned income was less than one-half of your support.
  2. In case any of your parents were alive at the end of the tax year 2018.
  3. In case you’re not filing a joint return for the taxable year 2018.

Difference between American Opportunity Tax Credit and Lifetime Learning Credit

AOTC                       LLC
The maximum credit limit is up to $2,500.The maximum credit limit is up to $2,000.
40% of the credit may be refundable.The credit is not refundable at all.
It is available to the eligible students only for 4 tax years.It is available to the eligible students for n number of tax years.
The limit of MAGI is as follows:

MFJ: $180,000

Single, Head of Household or qualifying widower: $90,000

The limit of MAGI is as follows:

MFJ: $132,000

Single, Head of Household or qualifying widower: $66,000

People Also Ask

Q. Is it possible to claim AOTC without Form 1098-T?

A. Yes, it is possible to claim AOTC even if you don’t have Form 1098-T by keeping the record that proves you to be a student enrolled in the institute and has paid qualified tuition and related expenses.

Q. What can be done if you did not receive Form 1098-T from university but paid for qualified expenses?

A. In case you claim expenses that were not reported on the Form 1098-T as your amount paid, you need to send copies of your paid receipts, cancelled checks or other documents as proofs to the IRS.

Q. Is valid TIN before the due date of the return for claiming AOTC required?

A. You may not be able to claim for AOTC until you, your spouse filing a joint return and a qualifying student have a valid Taxpayer Identification Number (TIN) which is issued or applied on or before the due date of the return including extensions.

How can H&R Block help you?

H&R Block is the global leader in the Income Tax filing services domain. Get your U.S. Expat tax filing done by our tax experts who will help you understand your tax modalities, prepare your return and file it online.

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Anshu Jain
Anshu Jain is the Manager, Offshore Operations at H&R Block (India). She holds an MBA in Finance and has an experience of over ten years in business operations, U.S. tax advisory and program management. When she is not working, Anshu enjoys reading and writing about U.S. taxation.

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