How the American Opportunity Tax Credit Works

A student or other tax filer claiming a student as a dependent can take the full AOTC up to four years in a row. It comes with a variety of restrictions that people should be aware of before claiming the credit.

In order to be eligible for the credit, the student has to be pursuing a degree or another recognized credential. Advanced balloon animal crafting lessons probably aren't going to cut it, unless they're part of Florida State University's circus performing class. If your school sends you a Form 1098-T Tuition Statement in January, that means you're likely enrolled in an eligible program. The form details the tuition and other expenses that you've paid over the course of the previous year [source: IRS].

The student also has to actually be going to school. That means being enrolled at least part-time in at least one academic period during the tax year. The student can't have completed four years of post-secondary education at the time. He or she also can't have already claimed the credit in four previous years. And, as if college kids need another reason to steer clear of university and local cops, it can also help them catch a little break on their taxes. Students who have been convicted of a felony drug offense are not eligible for the AOTC [sources: IRS, IRS].

Taxpayers looking to claim the credit also have to meet certain income requirements. The full AOTC is available for a single filer who makes up to $80,000 ($160,000 for joint filers) in adjusted gross income over a year. Those who make between $80,000 and $90,000 ($180,000 for joint filers) can get a portion of the credit at a reduced rate [source: IRS].

That's a significantly higher income limit than the one in place for the other student tax credit, the Lifetime Learning Credit. That's not the only difference between the savings opportunities.

The American Opportunity Tax Credit and the Lifetime Learning Credit are designed to help ease the burden of tuition and related expenses for students and their families. The trouble is, you can't claim both credits in the same year. To decide which one is best for you, take a look at the some of the ins and outs of each credit.

In taxes, as in life, size matters. The maximum AOTC ($2,500) is bigger than the maximum LLC ($2,000). The LLC is calculated based on 20 percent of up to $10,000 in tuition and other costs source: IRS].

The LLC may still be attractive to tax filers who have used up four consecutive AOTCs or who are enrolled in programs not covered by the AOTC. The LLC applies to a wide range of learners seeking to improve their education or job prospects. Students need not be pursuing a degree in order to take advantage of the LLC and don't need to be going to school at least part time. Instead, LLC filers only have to show that the course for which they're seeking the credit is offered by an approved institution and is either counting toward a degree or useful in developing job-related skills [sources: IRS, IRS].

Meanwhile, the AOTC is available to tax filers with higher incomes than those eligible for the LLC. A person who makes $52,000 or less ($104,000 for joint followers) is eligible for the full amount of the LLC. Those who make more than $52,000 and less than $62,000 ($124,000 for joint filers) can get a reduced credit [source: IRS].

Oh, and there's one other important difference between the AOTC and LLC: The AOTC is partially refundable. If the government owes you cash at the end of the year, you can add up to $1,000 worth of money to the tab.