How to Qualify for the American Opportunity Credit if I Have a Pell Grant and Loans

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The American Opportunity Tax Credit, also known as the American Opportunity Grant, is a tax rebate for up to $2,500. You can claim the credit for up to four years as long as they are the first four years of postsecondary education. If your parent, guardian or spouse claims you as a dependent, they are eligible to claim the grant but you aren't. The Internal Revenue Service prohibits you from claiming the American Opportunity Grant for expenses paid using other tax-free money, such as Pell grants, but you can still qualify under some circumstances.

Keep a complete record, including receipts, of all qualified expenses for your college education. Qualified expenses include tuition, books and fees. Other qualified expenses are supplies, computer equipment and software. You may also add in a percentage of your Internet access costs based on how much you use the computer for school-related work.

Request a statement from your school’s office of financial aid that lists your Pell grant award, any other tax-free funding and charges that count as qualified expenses. The school will issue you a Form 1098 to document this information.

Exclude money you received from student loans. Unlike grants, you must repay student loans after you finish school. Further, you normally pay the loans out of you taxable earnings. The IRS doesn’t consider student loan money as tax-free funding and does not count it against you when determining if you qualify for the American Opportunity Grant.

Subtract the total of your tax-free funding from the total of your qualified expenses. If expenses are more than the tax-free funding, you can get the difference -- up to the $2,500 limit -- as an American Opportunity credit. For example, if you have $7,000 in qualified education expenses and received a Pell grant for $5,000, you receive the tax credit for the $2,000 you paid out of pocket.

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