The American Opportunity credit, which replaced the HOPE credit, equals 100 percent of the first $2,000 of qualified expenses
(tuition, fees required for enrollment, and required course materials), and 25 percent of the next $2,000 of
qualified expenses. An individual must pay $4,000 of expenses in order to claim
the maximum credit of $2,500. The credit is allowed for the first four years of
postsecondary education for each eligible student. An eligible student is
defined as a dependent of the taxpayer, or the taxpayer or taxpayer's spouse, if
they are not claimed as a dependent on another person's tax return. An eligible
student must be enrolled at least half-time to qualify for the credit. The
credit is 40 percent refundable, so that an individual with no liability can
receive $1,000 of the $2,500 maximum credit as a refund. The remaining $1,500
may only be used to offset liability. Any remaining credit amount that exceeds liability may not be carried forward
to future tax years.
The American Opportunity credit directly offsets up to $2,500 of federal income tax
liability with $1,000 allowed as a refund. There are no state tax benefits.
Interaction with other programs
Taxpayers may not claim both the American Opportunity credit and the Lifetime Learning
credit for the same student in one tax year, but may claim the American Opportunity credit
during the first four years of a student's postsecondary education and the
Lifetime Learning credit in any following years. Taxpayers may not claim the American Opportunity
credit for higher education expenses paid for with proceeds from the sale of
qualified U.S. savings bonds if the taxpayer chooses to deduct the bond interest
income as allowed under the Education Savings Bond program. Students may
pay for expenses not counted towards claiming the American Opportunity credit with funds
withdrawn from a Qualified Tuition Program (QTP) savings plan or from a Coverdell ESA.
Taxpayers may claim the American Opportunity credit for expenses paid with funds obtained
through a student loan, with the interest on the loan allowed as an
income tax deduction at the time the loan is repaid. The amount of American
claimed does not reduce the amount of state financial aid for which the
student is eligible.
The American Opportunity credit is subject to an income-based phaseout. For tax year 2016, the credit is phased
out for married taxpayers with modified adjusted gross income (AGI) between
$160,000 and $180,000, and for single filers (generally students) and heads of
household (generally single parents of students) with modified AGI between
$80,000 and $90,000. Taxpayers with modified adjusted gross income above the
phase-out may not claim the American Opportunity credit. Modified adjusted gross income equals
adjusted gross income plus foreign earned income, housing costs of individuals
living abroad, and income from sources within Puerto Rico and U.S. territories.