The AOTC is a tax credit with a non-refundable and refund-able component to help make college more affordable for eligible students. A non-refundable portion is allowed to the extent it does not exceed the taxpayer’s income tax liability. The refundable portion allows the taxpayer to receive a refund regardless of the tax liability.
The AOTC is based on 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses paid during the year, for a maximum credit of $2,500. Up to 40% of the credit is refundable. Students subject to kiddie tax rules are ineligible for the refundable portion.