Preparing for a Prosperous Future

Claiming The American Opportunity Tax Credit For Education Expenses

An income tax credit is available to help defray the cost of college tuition and books. The American opportunity credit in especially noteworthy because a portion of it is refundable, even if there is no tax to offset. Parents, and sometimes students themselves, can reduce their taxes or receive a refund based on expenses for undergraduate education.


Also known as the AOC, the credit can be claimed in its entirety for up to four separate years. The credit applies to expenses for colleges, universities, or postsecondary vocational schools. The key determining factor for school qualification is whether your institution is also eligible for U.S. Department of Education student aid programs.

The AOC is usually taken by the parent of a student under age 24. Even if the student files a separate tax return, the parent claims the credit if the child is still a dependent. Students providing over half of their own support can claim the credit if they are not included on the parent's return.

Qualifying expenses

Most postsecondary institutions send students an IRS Form 1098-T each year to summarize payments to the school. The form provides a financial summary of your school account, including amounts you may have received for grants or scholarships. Form 1098-T is the starting point for calculation of the credit.

Only $4,000 of expenses can be used for the AOC. However, that $4,000 amount can yield a sizable tax credit of up to $2,500. Up to $1.000 of the credit is refundable, meaning that it is refunded even if you owe no taxes. The remainder of the credit is used to offset up to $1,500 in taxes otherwise due.

For the tax credit, tuition payments made with loan proceeds are no different than any other payment method. Expenses are being paid from your own pocket whether paid with cash or increased debt. Form 1098-T will provide you with a summary figure, regardless of how it was paid. You only need to subtract grants and scholarships, and then add books.

Tax return reporting

The AOC is figured on IRS Form 8863, which supports Form 1040. The form received from your school is used to complete Form 8863. An experienced tax preparer is helpful in categorizing the Form 1098-T information. After the total for tuition and fees is reduced by any tax-free grants or scholarships, separate expenses for books are added to arrive at your net cost.

The AOC provides a powerful opportunity to reduce the cost of education. Contact a tax services professional like one from McLaren & Co PC for further assistance in claiming an education tax credit.