<p>The IRS says the following: 40% percent of the American opportunity credit may be refundable. This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. The nonrefundable part of the credit may be limited by the amount of your tax.</p>
<p>Im wondering if part of your tax is the federal withholding tax taken from each of your paychecks. Or are they basing the 40% refund amount on your final 1040 tax due every April 15? Or is it something else?</p>
<p>If its the second one, does that mean that if you are owed a refund on your 1040 on April 15, that you get only an additional $1000 for the American Opportunity Credit ($2500 x 40%)?</p>
<p>Can’t really explain it, since we used Turbo Tax, but yes, on the 1040, when the math is done on the $2500 x 40% we ended up with $1000 coming back to us. We already got our Fed. refund back. However it’s calculated, it’s like we got credit for $1500 worth, and then the other $1000 back to us…thank god for tax software. For some people it can make sense to choose between the Lifetime Learning credit vs. taking the AOC, but the software also figures that out, and since AOC will probably end, it’s probably worth taking while it’s offered.</p>
<p>Whether you get a refund or owe more tax when you file your taxes is irrelevant to whether you can claim the AOC. What matters is the final tax amount as shown on your tax form.</p>
<p>For example, if your final tax amount is $0, all you can get is the $1000 refundable part.</p>
<p>If your final tax amount is $1500 or higher, you can get get the full $2500.</p>
<p>Subject to the income limits of course.</p>
<p>If you are owed a refund, and can take the full $2500 credit, your refund goes up by $2500.</p>