If You Receive a Pell Grant Do You Qualify for the American Opportunity Tax Credit?

Pell grants won't automatically disqualify you from the American opportunity credit.

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The American opportunity credit is a tax credit available for students in their first four years of post-secondary education, such as trade school or college. Up to 40 percent or $1,000 of the credit, whichever is less, is refundable, which means you can get a tax refund for a portion of the credit even if you have no tax liability. The credit is claimed by the parent if the student is still claimed as a dependent. You may still qualify for the American opportunity credit even if you receive a Pell grant.

Qualified Educational Expenses

When determining the American opportunity credit, qualified educational expenses include your tuition and fees plus any books, supplies or equipment you need for your course of study. Unlike other education credits and deduction, it doesn’t matter whether you must purchase the books from your school’s store or can get them from another source. Qualified expenses do not include room and board.

Reductions for Tax-Free Aid

When figuring your qualified educational expenses for the American opportunity credit, you must reduce the expenses by tax-free assistance you receive, which includes Pell grants and scholarships. For example, say you have $7,000 in qualified expenses, but receive a $4,200 Pell grant. Your qualifying expenses for figuring the American opportunity credit drop to $2,800. Essentially, you’re not allowed to claim a tax credit for money you didn’t pay out-of-pocket.

Other Eligibility Requirements

Besides having qualified educational expenses, you must also meet several other requirements to claim the American opportunity credit. First, you must be enrolled at least half-time in a post-secondary school seeking a degree or other recognized credential. In addition, the school cannot consider you to have already completed four years of post-secondary work, and you can’t have any felony drug convictions on your record. Also, your modified adjusted gross income must fall below the annual limits and your filing status can’t be married filing separately. Finally, you can’t claim the American opportunity credit if you (or your parents, on your behalf) claimed the credit in four prior years.

Figuring Your Credit

The American opportunity credit equals 100 percent of your first $2,000 of qualified educational expenses plus 25 percent of your next $2,000. If you have $4,000 or more of qualified educational expenses, you can claim the maximum credit, which is $2,500. If you have less, you must calculate the credit. For example, say you had $2,800 of qualified expenses after reducing your total for your Pell grant. Your credit would be 100 percent of your first $2,000 plus 25 percent of the remaining $800 for a total credit of $2,200.