Is the American Opportunity Tax Credit Refundable?

Yes. The American Opportunity Tax Credit is partially refundable.

For eligible taxpayers, up to 40% of the allowable credit may be refundable, with a maximum refundable amount of $1,000 per student.

The remaining 60% is generally nonrefundable and can reduce qualifying federal income tax liability.

For a taxpayer eligible for the full $2,500 credit:

·         Up to $1,500 is nonrefundable.

·         Up to $1,000 is refundable.

However, special restrictions apply to certain taxpayers under age 24.

Example: How the Refundable AOTC Works

Suppose a married couple pays $8,000 in qualified education expenses for their dependent daughter, who attends college.

They meet the eligibility requirements and qualify for the maximum $2,500 credit.

Their federal income tax liability before the credit is $1,000.

 

Tax Calculation / Amount

Federal income tax before AOTC /$1,000

Nonrefundable AOTC used / $1,000

Federal income tax after nonrefundable credit / $0

Refundable AOTC / $1,000

In this simplified example, the couple reduces their $1,000 income tax liability to zero and receives an additional $1,000 refundable credit.

 

The unused $500 of the nonrefundable portion cannot independently produce a refund.

The final tax refund or balance due also depends on withholding, estimated payments, other credits, and additional tax obligations.

 

Who Qualifies for the American Opportunity Tax Credit?

To claim the AOTC for 2025, the taxpayer and student must satisfy several eligibility requirements.

Enrollment Requirements

The student must be enrolled at an eligible educational institution.

Additionally, the student must:

·         Be pursuing a degree, certificate, or other recognized educational credential.

·         Be enrolled at least half-time for at least one qualifying academic period.

·         Meet the institution's definition of half-time enrollment.

An academic period generally includes a semester, trimester, quarter, or another period of study established by the school.

For 2025, certain qualified expenses paid in 2025 for an academic period beginning during the first three months of 2026 may also qualify.

First Four Years of Higher Education

The AOTC is generally available only when the student has not completed the first four years of postsecondary education before the beginning of the tax year.

For example, an eligible student attending the third year of an undergraduate degree program may qualify.

However, a student who already completed the first four years of postsecondary education before 2025 generally cannot claim the AOTC for 2025.

Four-Year Credit Limit

The American Opportunity Tax Credit can generally be claimed for no more than four tax years per student.

The four years do not have to be consecutive.

Previous years in which the former Hope Credit was claimed for the student also count toward this limitation.

Drug Felony Conviction Restriction

The student must not have a federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

Taxpayer Identification Requirements

For the 2025 tax year, applicable taxpayer identification number requirements must be satisfied by the due date of the return, including extensions.

The student's identification information and the educational institution's Employer Identification Number (EIN) are important when completing Form 8863.

Different Social Security number requirements take effect beginning with the 2026 tax year.

What Are the Income Limits for the American Opportunity Credit?

The AOTC is subject to modified adjusted gross income (MAGI) limitations.

For 2025, the credit begins to phase out when income exceeds certain thresholds.

 

Filing Status / Full Credit Generally Available / Credit Phaseout / No Credit

 

For example, a single taxpayer with MAGI of $85,000 falls within the phaseout range and may qualify for a reduced credit.

For most taxpayers, MAGI for the AOTC starts with Adjusted Gross Income reported on Form 1040, with certain modifications when applicable.

 

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What Expenses Qualify for the American Opportunity Tax Credit?

Qualified education expenses generally include tuition and fees required for enrollment or attendance at an eligible educational institution.

Certain course materials also qualify, even when they are not purchased directly from the school.

Examples of potentially qualifying expenses include:

·         College or university tuition

·         Required enrollment fees

·         Required textbooks

·         Supplies needed for a course of study

·         Equipment needed for coursework

·         Certain required student activity fees

A computer may qualify when it is needed for the student's course of study and satisfies the applicable education expense rules.

However, purchasing a computer for general personal use does not automatically make it an eligible AOTC expense.

What Expenses Do Not Qualify for the AOTC?

Some common college expenses generally do not qualify for the American Opportunity Tax Credit.

These include:

·         Room and board

·         Transportation

·         Health insurance

·         Medical expenses

·         Personal living expenses

·         Sports, hobbies, or other noncredit courses that are not part of the student's qualifying educational program

Even when these costs are necessary for attending college, they generally cannot be used to calculate the AOTC.

Can You Claim the AOTC if You Pay Tuition With Student Loans?

Yes. Qualified education expenses paid with student loan proceeds may be eligible for the American Opportunity Tax Credit.

For example, if you use a student loan to pay $4,000 in qualified tuition and course materials during 2025, those expenses may be considered when calculating your 2025 AOTC.

You generally claim the credit for the year the qualifying expenses are paid, rather than the year you repay the student loan.

The same principle generally applies when eligible expenses are paid by cash, check, or credit card.

However, the taxpayer and student must satisfy all other eligibility requirements.

Can You Claim the American Opportunity Credit With a 529 Plan?

Yes. You may be able to claim the AOTC while also using distributions from a 529 education savings plan.

However, the IRS does not allow the same education expense to support both the American Opportunity Tax Credit and tax-free treatment of a 529 plan distribution.

This restriction is commonly called the no double benefit rule.

Coordinating AOTC and 529 Plan Expenses

Suppose a student incurs the following education expenses:

Education Expense / Amount

Qualified tuition and fees / $8,000

Required course materials /  $1,000

Eligible room and board /  $6,000

Total education expenses / $15,000

 

Assuming the student and taxpayer meet all eligibility requirements, $4,000 of the qualified tuition and course materials could be allocated to the AOTC.

Other eligible expenses may then be available to support tax-free 529 distributions, subject to the applicable 529 plan rules.

Room and board generally does not qualify for the AOTC, but it may qualify for tax-free 529 distributions when the student meets the required enrollment and expense conditions.

 

 

Do Scholarships and Grants Affect AOTC Eligibility?

Yes. Tax-free scholarships, Pell Grants, employer-provided educational assistance, and other qualifying tax-free education benefits may reduce the amount of expenses available for the American Opportunity Tax Credit.

Generally, expenses used to calculate the AOTC must be reduced by applicable tax-free educational assistance.

Example: Scholarship and Tuition Expenses

Suppose a student has $6,000 in qualifying tuition and course materials and receives a $3,000 tax-free scholarship used for those expenses.

The amount potentially available for the AOTC would be:

$6,000 − $3,000 = $3,000

The calculated credit on $3,000 in qualified expenses would generally be $2,250 before applying any other limitations.

In certain situations, taxpayers may be able to coordinate scholarships differently when the scholarship terms permit funds to be used for nonqualified expenses.

Treating some scholarship funds as taxable income may increase expenses available for an education credit. However, it can also increase the student's taxable income and may affect other tax benefits.

The overall tax result should be evaluated before using this approach.

Can Parents Claim the American Opportunity Credit for Their Children?

Yes. Parents may qualify for the AOTC when they claim an eligible student as a dependent on their federal income tax return.

The student must meet the educational eligibility requirements, and the parents must satisfy the applicable income, filing status, and other conditions.

A dependent student's qualifying education expenses may be treated as paid by the parent for purposes of calculating the credit, including certain amounts paid by the student or third parties.

However, the same student cannot generate an AOTC claim on both the parent's and student's tax returns for the same tax year.

Can a College Student Claim the AOTC on Their Own Return?

Yes. Eligible college students may claim the American Opportunity Tax Credit on their own federal income tax returns if they satisfy the applicable requirements.

However, a student generally cannot claim the credit when another taxpayer actually claims that student as a dependent.

If a student is eligible to be claimed as a dependent but is not claimed, special rules determine whether the student can claim a nonrefundable education credit.

Students should also consider restrictions on the refundable portion of the AOTC.

AOTC Refund Restrictions for Students Under Age 24

Some students under age 24 cannot receive the refundable portion of the American Opportunity Tax Credit.

This restriction generally applies when all the relevant conditions involving age, earned income, student status, parental survival, and filing status are met.

For example, the restriction may apply to an unmarried full-time student who is age 19 through 23, whose earned income is less than half of their support, and who has at least one living parent at the end of the year.

Different age-related conditions apply to students under age 18 and those age 18.

These taxpayers may still qualify for the nonrefundable portion if they meet the other AOTC requirements.

The restriction is related to the special rules governing certain younger taxpayers and does not necessarily require the student to actually owe kiddie tax.

When Can You Not Claim the American Opportunity Tax Credit?

You generally cannot claim the AOTC if:

·         Your filing status is Married Filing Separately.

·         Another taxpayer claims you as a dependent.

·         Your MAGI is at or above the applicable maximum income threshold.

·         The student has already used the AOTC or former Hope Credit for four tax years.

·         The student completed the first four years of postsecondary education before the beginning of the tax year.

·         The student does not meet the required enrollment or educational program conditions.

·         The student has a disqualifying felony drug conviction.

·         You claim the Lifetime Learning Credit for the same student in the same year.

·         You attempt to use the same expenses for another prohibited education tax benefit.

·         You do not meet the applicable taxpayer identification or other eligibility requirements.

Nonresident alien taxpayers may also be ineligible unless the relevant rules permit them to elect resident treatment for tax purposes.

How to Claim the American Opportunity Tax Credit

The AOTC is generally claimed using IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).

Check Your Eligibility

Confirm the student's enrollment status, educational history, and eligibility for the credit.

Review your filing status and modified adjusted gross income.

Gather Educational Records

Collect documents such as:

·         Form 1098-T, Tuition Statement

·         Tuition payment receipts

·         Required textbook and course material receipts

·         Scholarship and grant statements

·         Student loan payment records for qualifying expenses

·         529 plan distribution information

·         Documentation of enrollment status

Calculate Qualified Expenses

Determine which expenses qualify for the AOTC and subtract applicable tax-free educational assistance.

Avoid using the same expenses for multiple tax benefits.

Complete Form 8863

Use Form 8863 to calculate the credit and determine the applicable refundable and nonrefundable portions.

File Your Federal Income Tax Return

Include Form 8863 with Form 1040 or Form 1040-SR.

For the 2025 tax year, the refundable AOTC is generally reported on Form 1040, Line 29, while the nonrefundable amount flows through Schedule 3.

Keep supporting records in case the IRS requests documentation.

What Is Form 1098-T?

Form 1098-T, Tuition Statement, is an information return generally provided by eligible educational institutions.

It reports certain tuition-related payments and may include information about scholarships, grants, enrollment status, and prior-year adjustments.

For the 2025 tax year, students generally should have received Form 1098-T by early February 2026.

The amount shown on Form 1098-T may not reflect all qualified education expenses that can be considered for the AOTC.

For example, qualifying textbooks purchased from an outside retailer may not appear on the tuition statement.

Although Form 1098-T is generally required for education credit claims, IRS rules provide exceptions for certain situations in which the educational institution is not required to issue the form.

Taxpayers must still substantiate their qualifying expenses.

American Opportunity Credit vs. Lifetime Learning Credit

The Lifetime Learning Credit (LLC) is another federal education tax credit that may be available when a taxpayer does not qualify for the AOTC.

 

Feature / American Opportunity Credit / American Learning Credit

   

The AOTC may provide a larger benefit for qualifying undergraduate students.

The LLC may be useful for graduate students, part-time students, and individuals taking qualifying courses to acquire or improve job skills.

You cannot claim both credits for the same student during the same tax year.