What Is the American Opportunity Credit?

College costs keep going up, and the American Opportunity Credit (AOC) is one way to ease the burden. This tax credit helps eligible students and their families offset some of the cost of higher education by reducing tax liability—and part of the credit can be refunded even when you don’t owe tax. Knowing how the AOC works, who qualifies, and how to claim it can help you get the most benefit.

How the American Opportunity Credit Works

Eligible taxpayers can claim up to $2,500 per student each year. The amount is based on 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000. So if a student has $4,000 or more in qualified expenses, the full $2,500 credit is available.

A standout feature of the AOC is that part of it is refundable. Most credits only reduce tax; the AOC allows a refund of up to 40% of the credit. So you can receive as much as $1,000 as a refund even when you owe no tax. That makes the credit especially useful for lower-income families who might not have enough tax liability to use a nonrefundable credit fully.

Eligibility Requirements

Not everyone can claim the American Opportunity Credit. The student must be in higher education at an eligible institution. The credit is only for undergraduate students who are enrolled at least half-time in a degree or credential program. Graduate students and anyone who has already completed four years of post-secondary education do not qualify.

Income limits apply. The full credit is available when modified adjusted gross income (MAGI) is $80,000 or less for single filers and $160,000 or less for married filing jointly. The credit phases out above those amounts and is fully gone once MAGI exceeds $90,000 (single) or $180,000 (married filing jointly).

The school must be eligible to participate in federal student aid programs—generally accredited colleges, universities, and vocational schools. The student also cannot have a felony drug conviction on record at the time the credit is claimed; that can disqualify them.

Limitations and Restrictions

The AOC is only available for a maximum of four tax years per student. If undergraduate study stretches beyond four years or the student pursues another degree, other credits (like the Lifetime Learning Credit) may apply instead.

Students with a felony drug conviction cannot claim the AOC. If the student is claimed as a dependent on someone else’s return, the person who claims them (e.g., the parent) must be the one to claim the credit.

You cannot double-dip. Expenses paid with tax-free educational assistance—such as scholarships or employer tuition reimbursement—cannot also be used for the AOC. The same goes for expenses paid with 529 plan funds; those dollars cannot be counted again for the AOC.

Qualified Expenses

Not every education-related cost counts. Eligible expenses include tuition, required fees, and course materials such as books, supplies, and equipment. Unlike some other education benefits, the AOC allows these materials even when they are not bought from the school.

Room and board, transportation, insurance, and medical expenses do not qualify. Example: a student pays $10,000 for tuition and $8,000 for campus housing and meals. Only the $10,000 tuition counts toward the AOC. Getting this right helps you claim only eligible amounts and avoid errors.

Comparison to Other Education Credits

The AOC isn’t the only education tax benefit. You have to choose the one that fits your situation. The main alternative is the Lifetime Learning Credit (LLC), which gives up to $2,000 per return for qualifying education expenses. The LLC can be claimed for an unlimited number of years and applies to undergraduate and graduate students, plus people taking courses to improve job skills.

The AOC offers a higher maximum benefit and a refundable piece, but it’s limited to four years per student and only to those pursuing a degree. The LLC covers a wider group of students but has no refundable amount. Compare your eligibility and goals to decide which credit helps you more.

How to Claim the Credit

To claim the American Opportunity Credit, complete IRS Form 8863, Education Credits, and attach it to your federal return. You’ll use information from Form 1098-T, Tuition Statement, which the school sends you. It shows tuition and other eligible amounts paid during the year.

Keep your expenses in line with IRS rules and save receipts for tuition, books, and required materials. Mistakes on Form 8863—such as ineligible expenses or claiming after the four-year limit—can cause delays or denials. If you’re unsure about eligibility or how to claim the credit correctly, a tax professional can help.