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This College Tax Credit Saved the Typical American Family $2,277

By Dan Caplinger - Feb 25, 2018 at 6:02AM

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College education is more expensive than ever, and many students come out of school with tens of thousands of dollars in student loan debt. It's worth pursuing any financial support you can get to help fund your education.

One way that the federal government helps to finance college education is by offering valuable tax breaks to students and their families. In particular, using the American Opportunity Tax Credit can save you as much as $10,000 over the course of a college education. Below, we'll look more closely at this credit and how it saves millions of taxpayers thousands every year.

Row of people wearing black graduation gowns and mortarboard hats.

Image source: Getty Images.

What is the American Opportunity Credit?

The American Opportunity Tax Credit is available to undergraduate students for up to four years of their college education. The credit is structured so that you can get dollar-for-dollar reimbursement of the first $2,000 you spend toward eligible college expenses in the form of tax reduction. A further 25% credit is available on the next $2,000 spent, which can add up to an extra $500 in tax reduction for those who spend $4,000 or more in annual college costs.

The credit is also unusual in that students and families are allowed to get a portion of their money back from the IRS even if they wouldn't otherwise owe any tax. Up to 40% of the credit is refundable, making that part available to those with zero tax liability.

In claiming the credit, you're allowed to claim what you pay for tuition, required course materials, and mandatory school fees. You're not allowed to claim room and board, transportation, or other side expenses of going to college.

There are also restrictions on what course of study is allowed in claiming the credit. You need to be enrolled in a degree program or receive a certificate or other recognized educational credential at the end of your course of study. You also have to attend school at least half-time in order to receive the American Opportunity Credit.

Can you take the credit?

Even if you otherwise qualify, not everyone is allowed to take the full amount of the credit. Income limitations apply, so that single filers who make more than $90,000 in modified adjusted gross income can't claim the credit. Singles making between $80,000 and $90,000 can only take a partial credit. The corresponding range for joint filers is $160,000 to $180,000.

Despite all of its restrictions, the American Opportunity Tax Credit has been quite popular. Nearly 9.7 million taxpayers claimed the credit in the most recent year for which IRS tax data is available, and the total savings exceeded $22 billion. That worked out to average savings of $2,277 per family for those claiming the credit.

Also, keep in mind that if you have multiple students in your family who qualify for the credit, then each of them has the right to claim up to the full amount. That wasn't all that common, but nearly 775,000 taxpayers had two children that qualified for the credit, and more than 60,000 included three children in college to get the credit.

Get educated about college tax credits

The American Opportunity Tax Credit is a great way to help to reduce the out-of-pocket costs of a college education. A $2,277 credit might only be a small part of the tuition bill you pay every year, but every little bit helps to reduce the amount that has to come from your own financial resources -- or that you have to borrow and pay back for years after you graduate.

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