	Introduction

The American Opportunity Tax Credit (AOTC) provides financial assistance to taxpayers whose children (or who themselves) are pursuing post-secondary education. This report is organized to first provide an overview of the AOTC, followed by a legislative history that highlights the evolution of education tax credits from proposals in the 1960s through the recent permanent extension of the AOTC at the end of 2015. This report then analyzes the credit by looking at who claims the credit, the effect education tax credits have on increasing attendance at higher education institutions, and administrative issues with the AOTC. Specifically, the AOTC begins to phase out when income exceeds $80,000 ($160,000 for married taxpayers filing jointly) and is completely phased out when income exceeds $90,000 ($180,000 for married taxpayers filing jointly). The AOTC is a refundable credit, meaning taxpayers with little to no tax liability may still be able to benefit from this tax provision. On a per capita basis, the value of the AOTC, as enacted ($2,500) as part of the American Recovery and Reinvestment Act (ARRA; P.L. (The AOTC replaced the Hope Credit, but does not affect the Lifetime Learning Credit.) The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113 ), made the AOTC permanent, effectively eliminating the Hope Credit. In addition, the Treasury Inspector General for Tax Administration (TIGTA) has identified administrative issues with the AOTC and its predecessor, the Hope Credit. When education tax credits were first enacted in 1997, they were expressly intended to provide financial assistance to middle-income taxpayers. Specifically, in 2015, approximately 46.6% of AOTC dollars were claimed by taxpayers with income between $30,000 and $100,000. Notably, these gains were accompanied by the reduction in the share of AOTC dollars (in comparison to the Hope Credit) that went to taxpayers with income between $20,000 and $100,000. One of the primary goals of the AOTC is to increase attendance at post-secondary educational institutions. Because of the limited amount of data available concerning the AOTC, research instead focused more broadly on education tax incentives that lower tuition costs and that have been in effect for several years—namely the Hope Credit, the Lifetime Learning Credit, and the above-the-line tuition and fees deduction (see Appendix A for more information on these tax benefits). More recent research has found that while tax-based aid did have an impact on college attendance, a significant proportion of recipients—93%—would have attended college in the absence of these benefits. Complexity of Benefit: There are a variety of tax benefits that students or their families can claim when they file their taxes, including the AOTC, the Lifetime Learning Credit, and the tuition and fees deduction. While there are a variety of factors that may limit the ability of the AOTC to increase college attendance, research indicates that other forms of student aid including Pell Grants may have a similar impact as the AOTC on college attendance. Policy Options

Congress may also want to consider modifying the AOTC, or consolidating the AOTC with other education tax benefits. Policymakers may choose to either expand or limit certain parameters of the credit, for example, by using a different credit formula, changing the amount of qualifying expenses that can be used to claim the credit, adjusting the portion of the credit (currently 40%) that is refundable, modifying the income level at which the credit phases out, allowing taxpayers to claim the credit for either more or less than four years of post-secondary education, changing the definition of qualifying expenses (for example to include room and board), and providing nondegree-seeking students (such as students in job-training programs) eligibility for the credit. Alternative Policies to Reduce the Cost of Higher Education

The AOTC is one of a variety of policies designed to lower the cost of education to students and their families and hence increase accessibility to higher education.
The American Opportunity Tax Credit (AOTC)—originally enacted on a temporary basis by the American Recovery and Reinvestment Act (ARRA; P.L. 111-5) and made permanent by the Protecting Americans from Tax Hikes Act (PATH; Division Q of P.L. 114-113)—is a partially refundable tax credit that provides financial assistance to taxpayers (or their children) who are pursuing a higher education. The credit, worth up to $2,500 per student, can be claimed for a student's qualifying expenses incurred during the first four years of post-secondary education. In addition, 40% of the credit (up to $1,000) can be received as a refund by taxpayers with little or no tax liability. The credit phases out for taxpayers with income between $80,000 and $90,000 ($160,000 and $180,000 for married couples filing jointly) and thus is unavailable to taxpayers with income above $90,000 ($180,000 for married couples filing jointly). There are a variety of other eligibility requirements associated with the AOTC, including the type of degree the student is pursuing, the number of courses the student is taking, and the type of expenses which qualify.
Before enactment of the AOTC, there were two permanent education tax credits, the Hope Credit and the Lifetime Learning Credit. The AOTC replaced the Hope Credit (the Lifetime Learning Credit remains unchanged). A comparison of these two credits indicates that the AOTC is both larger—on a per capita and aggregate basis—and more widely available in comparison to the Hope Credit. Data from the Internal Revenue Service (IRS) indicate that enactment of the AOTC contributed to an increase in both the aggregate value of education credits claimed by taxpayers and the number of taxpayers claiming these credits.
Education tax credits were intended to provide federal financial assistance to students from middle-income families, who may not benefit from other forms of traditional student aid, like Pell Grants. The enactment of the AOTC reflected a desire to continue to provide substantial financial assistance to students from middle-income families, while also expanding the credit to certain lower- and upper-income students. A distributional analysis of the AOTC highlights that this benefit is targeted to the middle class, with approximately half (46.6%) of the estimated $17 billion of AOTCs in 2015 going to taxpayers with income between $30,000 and $100,000.
One of the primary goals of education tax credits, including the AOTC, is to increase attendance at higher education institutions (for brevity, referred to as "college attendance"). Studies analyzing the impact education tax incentives have had on college attendance are mixed. Recent research that has focused broadly on education tax incentives that lower tuition costs and have been in effect for several years, including the Hope and Lifetime Learning Credits, found that while these credits did increase attendance by approximately 7%, 93% of credit recipients would have attended college in their absence. Even though the AOTC differs from the Hope Credit in key ways, there are a variety of factors that suggest this provision may also have a limited impact on increasing college attendance. In addition, a recent report from the Treasury Department's Inspector General for Tax Administration (TIGTA) identified several compliance issues with the AOTC.
There are a variety of policy options Congress may consider regarding the AOTC. (The credit was not modified or changed in the recent tax law enacted at the end of 2017, P.L. 115-97.) Alternatively, Congress may want to examine alternative ways to reduce the cost of higher education. This report discusses these issues and concludes with an overview of selected proposals to modify the AOTC.