American Opportunity Tax Credit Guide: Save More on College Expenses

The AOTC generally covers qualified tuition and related expenses required for enrollment or attendance at an eligible educational institution.

Certain books, supplies, and equipment may also qualify, even when they are not purchased directly from the school, provided they are required for the student's course of study.

It is important to distinguish qualified expenses from costs that do not qualify. Room and board, transportation, insurance, medical expenses, and other personal costs generally cannot be included when calculating the AOTC.

Scholarships and grants may also affect the amount of expenses that can be used for the credit.

7. Calculate the Credit

Once you have determined the student's eligible expenses, calculate the AOTC based on the applicable formula.

For example, if a student has at least $4,000 in qualifying expenses, the maximum potential credit is $2,500.

If the student has fewer qualifying expenses, the credit will generally be lower. Taxpayers also need to consider scholarships, grants, employer-provided educational assistance, and other tax-free educational benefits that may reduce eligible expenses.

Because the calculation can become complicated when multiple forms of financial aid are involved, carefully review the applicable IRS rules.

8. Complete Form 8863

To claim the AOTC, taxpayers generally complete IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) and include it with their federal income tax return.

The form asks for information about the eligible student, the educational institution, qualified expenses, and the amount of education credit being claimed.

Enter the information carefully and make sure the student's name and identifying information match the information on the tax return and educational records.

9. Enter the Credit on Your Tax Return

After completing Form 8863, transfer the applicable credit information to the appropriate federal tax return.

Tax preparation software can often guide taxpayers through the education-credit questions and automatically calculate the credit based on the information entered.

If you use a professional tax preparer, provide your Form 1098-T and records of qualified education expenses so the preparer can determine whether you qualify.

10. Keep Your Records

After filing your tax return, keep your education-related records with your other tax documents. These may include Form 1098-T, tuition bills, receipts, payment records, scholarship information, and copies of relevant tax forms.

Good recordkeeping is especially important because taxpayers may need to demonstrate how they calculated the credit.

Common Mistakes to Avoid

One common mistake is claiming the AOTC without confirming that the student meets all eligibility requirements. Another is including nonqualified expenses such as room and board.

Taxpayers should also avoid claiming the same student's expenses twice through different education tax benefits. Additionally, do not assume that the amount shown on Form 1098-T is automatically the exact amount you should enter when calculating the credit.

Finally, check the income limits and current IRS rules for the specific tax year.