Most business owners we talk to don’t realize there’s a tax strategy sitting right in front of them when it comes to their child’s education. It’s called the American Opportunity Credit, and if you’re paying college tuition out of pocket, this can be a direct hit to your tax liability—in a good way.
Let’s break it down so you know exactly what it is, why it matters, and how to make it work.
What is the American Opportunity Credit?
The American Opportunity Credit is a tax credit—not a deduction. That means it directly reduces your income tax, dollar-for-dollar. You can claim up to $2,500 per student, per year, for things like tuition, fees, books, and required materials.
Even better? Up to $1,000 of it is refundable, which means you could get money back even if your tax liability is zero. That’s free money if you qualify.
Why It Matters for Business Owners
You’re likely paying for college with after-tax dollars—especially if you’re not leveraging a 529 plan or your income is too high to qualify for other deductions.
The American Opportunity Credit can:
- Reduce your tax bill by up to $2,500 per eligible student
- Put real money back in your pocket if part of it is refundable
- Help fund college without adding unnecessary tax friction
And unlike many deductions, you don’t have to itemize to claim it.
So if you’re already cutting checks for tuition or helping cover education costs, this strategy helps ensure you’re not overpaying Uncle Sam while doing it.
How to Qualify (and Maximize It)
Here’s what you need to know:
- The student must be in their first four years of post-secondary education
- They must be enrolled at least half-time in a degree or credential program
- You (or the student) must receive a Form 1098-T from the school
- The student cannot have claimed the credit for more than four tax years
- The student cannot have a felony drug conviction
- You’ll also need to file a Form 1040 or 1040-SR to claim it—no married filing separately, 1040-NR, or dual-status returns allowed.
- As the taxpayer, you must have paid qualified education expenses out of pocket. These can include tuition, required books, supplies, and equipment. Room and board don’t count.
- You can claim the credit for multiple students if they each meet the criteria.
- Heads-up on income limits: The credit begins to phase out if your modified adjusted gross income is over $80,000 (single) or $160,000 (married filing jointly), and is completely phased out at $90,000 / $180,000.
A Quick Note on Double-Dipping
You can’t use the same expenses for both the American Opportunity Credit and a tax-free distribution from a 529 plan. So if you’re using multiple strategies to pay for college (good on you), be sure to coordinate your expenses accordingly—or get help from someone who will.
The Bottom Line
If you're already paying for college, the American Opportunity Credit is a clean way to offset the cost and lower your tax bill at the same time. It’s not going to make college cheap—but it can keep you from overpaying the IRS while doing a good thing for your family.
Schedule a consultation with Nth Degree today to make sure you’re claiming what you’ve earned and not leaving money on the table.
