What Is the American Opportunity Tax Credit and How Does It Work? (2025 Guide)

The American Opportunity Tax Credit (AOTC) helps students and their families reduce their tax liability through a partially refundable tax credit. It offers a maximum tax break of $10,000 over students' first four years of higher education, but not all taxpayers claim this valuable tax credit.

According to the latest IRS data, approximately $6.3 billion in education tax credits for college — including the AOTC — went unclaimed by 6 million taxpayers. If you're interested in claiming the American Opportunity Tax Credit, here's what you need to know.

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What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit is one of two education tax benefits for students and parents that offer a dollar-for-dollar reduction of a filer's tax liability. Individuals who paid for qualifying higher education expenses for themselves, a spouse, or a dependent can claim the AOTC.

If the credit brings a tax filer's owed taxes to zero, a partial refund is issued.

Further Reading: How To Claim Your Student Loan Interest Deduction: A Step-by-Step Guide

How much is the AOTC worth?

The AOTC offers a maximum $2,500 credit for each eligible student. The credit applies to 100% of the first $2,000 of qualifying higher education expenses, per student, and 25% of the next $2,000 in qualifying expenses for that student — which is $500. Taxpayers can claim the tax credit for each of their eligible dependent students.

If the resulting credit brings the amount of tax owed to zero, tax filers can expect 40% of the remaining credit to be refunded (up to $1,000).

Who qualifies for the American Opportunity Tax Credit?

Filers who claim the American Opportunity Tax Credit must be under the AOTC's modified adjusted gross income (MAGI) limits. For those who are married and filing jointly, this income limit is $180,000. All other filing statuses (including single, head of household, and qualifying surviving spouse) must be under the MAGI limit of $90,000 for AOTC eligibility.

The credit can only be used for the first four years of postsecondary school per student, and the student can't have completed those four years at the beginning of the tax year. Additionally, the student must be enrolled at least half-time for a minimum of one academic period during the tax year, and studying toward a degree or recognized credential program.

Students who have a felony drug conviction by the end of the tax year being filed are ineligible to claim the credit, as are those students who claimed the AOTC or the former Hope credit for more than four years.

How to claim the American Opportunity Tax Credit

To claim the American Opportunity Tax Credit, your educational institution must have issued you or your eligible student a tax Form 1098-T Tuition Statement, though there are some exceptions. The Tuition Statement is required to fill out IRS Form 8863 Education Credits. Taxpayers must include Form 8863 with Form 1040 when filing their taxes.

Paul Miller, managing partner and certified public accountant (CPA) at Miller & Company, LLP, says there's a timing strategy students and families should be mindful of when it comes to making tuition payments.

“The AOTC is based on amounts paid in a given tax year, not necessarily the academic period the tuition covers,” explains Miller.

“So if you're paying spring semester tuition in December instead of January, that payment counts for that tax year's AOTC. Just keep good records and work with a tax adviser to avoid overpaying or double-counting expenses.”

What expenses qualify for the AOTC?

The AOTC only applies to qualified education expenses. These include:

• Tuition
• Mandatory enrollment fees
• Course materials (necessary books, supplies, and equipment)

Education expenses that don't qualify include:

• Room and board
• Transportation
• Health insurance
• Courses that involve sports, games, or hobbies, unless those courses are related to the student's degree program

American Opportunity Tax Credit vs. Lifetime Learning Credit

Another education tax credit for college is the Lifetime Learning Credit (LLC).

Unlike the AOTC, the LLC isn't restricted to the first four years of higher education; students can claim the LLC for every year of postsecondary school and for tax years when courses were taken to upskill a career. It's important to note that the LLC is worth up to $2,000 per tax return, per year.

This means that if you have two dependent undergraduate students in your household, you can still only claim the LLC for up to $2,000 in a tax year. Alternatively, both students can claim the AOTC, but the same student can't claim both the AOTC and LLC in a tax year.

“If a taxpayer qualifies for both the AOTC and the Lifetime Learning Credit in the same year, I usually advise looking at which one offers the larger benefit,” says Miller.

He notes that the AOTC's refund of up to $1,000 can be impactful for low-income families, while the LLC covers a wider range of qualifying higher education expenses (like grad school or part-time study).

“It really comes down to the student's status, the type of program they're in, and total education expenses,” Miller explains.