Is the American Opportunity Credit refundable, and if so, how much can you receive as a refund?
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Yes, the American Opportunity Credit (AOC) is partially refundable. Specifically, up to 40% of the credit—capped at $1,000 per eligible student—can be refunded to you even if you owe no federal income tax for the year. The maximum total AOC per student is $2,500, which is calculated as 100% of the first $2,000 of qualified education expenses plus 25% of the next $2,000 of such expenses paid during the tax year. Of this $2,500, up to $1,000 may be received as a refund if your tax liability is less than the credit amount.
1. Key details
- Refundable Portion: 40% of the allowable AOC, up to $1,000 per student, is refundable. This means if your tax liability is reduced to zero by the credit, you can still receive up to $1,000 as a refund for each eligible student.
- Nonrefundable Portion: The remaining 60% (up to $1,500) is nonrefundable and can only be used to reduce your tax liability to zero.
- Eligibility for Refundable Portion: To receive the refundable portion, you must meet all AOC eligibility requirements, including income limits (full credit for MAGI up to $80,000 single/$160,000 joint, phased out up to $90,000/$180,000), and the student must not have completed the first four years of postsecondary education, must be enrolled at least half-time, and must not have a felony drug conviction.
- Special Rule for Certain Young Taxpayers: If the taxpayer claiming the credit is a child subject to the “kiddie tax” rules (generally under age 24, a full-time student, with at least one living parent, and not filing jointly, and whose earned income is less than half of their support), the refundable portion is not available; only the nonrefundable portion can be claimed.
2. Example
If you have $4,000 in qualified education expenses for an eligible student, you can claim the full $2,500 AOC. If your tax liability is $1,200, $1,200 of the credit will reduce your tax to zero, and the remaining $1,300 is subject to the refundability rule. Of that, only $1,000 (40% of $2,500) can be refunded; the rest is not used.
How to claim: You must file IRS Form 8863 with your tax return to claim the AOC and its refundable portion. The form will calculate both the nonrefundable and refundable parts based on your qualified expenses and tax liability.
3. Summary
- The AOC is partially refundable.- Up to $1,000 per eligible student can be refunded if your tax liability is less than the credit.
- The rest of the credit is nonrefundable and can only reduce your tax to zero.
- Special rules apply for certain young taxpayers claimed as dependents.
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