American Opportunity Tax Credit

The AOTC reduces students’ or their guardians’ owed taxes to assist with higher education expenses like tuition or purchasing course materials. The credit covers 100% of the first $2,000 of these expenses and reimburses 25% ($500) of the next $2,000 - amounting to a total credit of $2,500 per eligible student. In practice, the AOTC provides $10,000 towards expenses for a four year degree - roughly 12% of the average cost of in-state college tuition for four years.

Prior to the AOTC, students and their families could receive up to $1800 in credit for their higher education expenses by using the Hope Credit. The Hope Credit was signed into law under the Tax Reform Act of 1997 - at that time, the credit was capped at $1500 and only covered the first two years of higher education. By 2009, lawmakers recognized that the Hope Credit didn’t keep up with the rising cost of college tuition, and the AOTC was signed into law with the passing of the American Recovery and Reinvestment Act of 2009.
The AOTC was originally proposed by Barack Obama during his first term as president in 2009. On January 6, 2009, Congressman Chaka Fattah introduced H. R. 106, the American Opportunity Tax Credit Act. The act stated that all full-time college students were eligible for the credit, but only so long as they didn’t have felony drug convictions. The proposed annual credit amount was $4,000 in exchange for 100 hours of community service with either a governmental unit, hospital, or 501(c)3 organization. The Secretary of Education was held responsible for verifying the community service requirements. The only proposals that were passed from this act were 1. that all full-time college students were eligible, and 2. students are only eligible if they don’t have felony drug convictions.

A student must:
Be pursuing a degree or other recognized education credential
Be enrolled at least half time for at least one academic period (i.e. a semester) beginning in the tax year
Not have completed the first four years of higher education at the beginning of the tax year
Not have claimed the AOTC or the former Hope credit for more than four tax years
Not have a felony drug conviction at the end of the tax year

Unlike prior measures to assist students and families burdened with the cost of higher education, the AOTC can be claimed for four years. This helps ensure students complete their studies - before the AOTC was signed into law only 57% of full-time students pursuing bachelor's degrees in 2001 graduated by 2007.
Prior tax laws were of little benefit to low-income students and families because the credits were nonrefundable. Since the AOTC is refundable up to 40%, participants with no federal income tax liability can benefit from it.
The AOTC covers the purchase of textbooks as higher-education expenses while the Hope Credit of 1997 did not. According to the College Board, the cost of textbooks and other course materials exceeded $1000 for students at four-year colleges; a 2008 audit in California found that textbooks were the largest expense for students enrolled in the state’s community colleges.

When the AOTC was signed into law in 2009, it was assumed that gross annual tuition at a four-year public college was $7,500 and $25,000 for a four-year private college. For the 2019-2020 academic year, the average in-state tuition for a four-year public college is $11,260 and $41,426 for private colleges. The amount of credit granted to students and families has not been adjusted since the AOTC was signed into law.
Between 2009 and 2019, the cost of textbooks and course materials for students in higher-education has increased by 24% and the AOTC does not account for that increase in cost.
The AOTC provides its greatest benefits to middle income and upper-middle income taxpayers. Research has shown that the AOTC is not necessarily a powerful motivator in getting people in these income brackets to pursue higher education - they would do so regardless of their ability to benefit from the credit.

1. Information from the United States Internal Revenue Service: https://www.irs.gov/credits-deductions/individuals/aotc