The American Opportunity credit

How it works

The credit is 100 percent of the first this year's official aotc first tier expenses (not yet verified here; see the official source below) of qualified expenses plus 25 percent of the next equal slice, for a maximum of this year's official aotc max credit (not yet verified here; see the official source below) per student per year. Qualified expenses are tuition, required fees, and books and supplies needed for the course, whether bought from the school or not, but not room, board, or transportation. The student must be pursuing a degree or credential, be enrolled at least half time for one academic period, have no felony drug conviction, and not have finished four years of college at the start of the year. It can be claimed for four tax years per student. Up to 40 percent of the credit is refundable. It phases out between this year's official aotc phaseout single start (not yet verified here; see the official source below) and this year's official aotc phaseout single end (not yet verified here; see the official source below) for single filers, with doubled lines for joint filers, and married people filing separately cannot claim it.

What it gives

It is the largest education credit, and part of it comes back as a refund even when no tax is owed.

Books and supplies count even when bought elsewhere than the campus store.

A family with two students in college can claim it for each.

What it costs, or where the catch is

It is limited to four tax years per student, and a fifth year gets nothing from it.

Expenses paid with tax free scholarship money or 529 earnings cannot be counted again for the credit.

A dependent student cannot claim it on their own return while a parent is eligible to claim them.

A worked example

Greta is a sophomore enrolled full time, and her parents pay $6,500 in tuition and $700 for books. If the first tier were $2,000, the credit is 100 percent of $2,000 plus 25 percent of the next $2,000, which is $2,000 plus $500, for $2,500. Their income is below the phase out, so the full $2,500 cuts their tax. If their tax were only $1,500, the leftover $1,000 would be partly refunded, up to 40 percent of the credit.

Where it goes wrong

The frequent mistake is paying tuition from a 529 and also claiming the credit on the same dollars, which the rules do not allow, when paying part from pocket would have earned the credit.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: American Opportunity Tax Credit. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.