What Is an Education Tax Credit and Who Qualifies?

An education tax credit is a dollar-for-dollar reduction of your federal income tax based on what you paid for college, graduate school, or job-skills training. Two credits are available: the American Opportunity Tax Credit (AOTC), worth up to $2,500 per student per year, and the Lifetime Learning Credit (LLC), worth up to $2,000 per tax return.¹² You can claim only one of the two for the same student in the same year, and both use the same income limits to decide who gets the full amount, a reduced amount, or nothing.

How the Two Credits Compare

The AOTC covers 100 percent of the first $2,000 you pay in qualified expenses for an eligible student, plus 25 percent of the next $2,000. That produces a $2,500 maximum per student. Up to 40 percent of the credit (a maximum of $1,000) is refundable, meaning it can generate a refund check even if you owe no federal income tax.¹ You can claim the AOTC for a given student in up to four tax years.

The LLC equals 20 percent of the first $10,000 in qualified expenses on the return, for a $2,000 maximum. It is entirely non-refundable, so it can zero out your tax bill but cannot go beyond that.² What it gives up in size, it makes up in flexibility. There is no cap on the number of years you can claim it, no degree requirement, and no minimum enrollment. Graduate students, part-time students, and people taking a single course to build job skills all fit under the LLC when they would not fit under the AOTC.

You cannot use both credits for the same student in the same year. With multiple students in the household, you can claim the AOTC for one and the LLC for another on the same return, as long as you are not counting the same expenses twice.³

Who Qualifies

For either credit, the student has to be you, your spouse (on a joint return), or a dependent you claim.³ Anyone using the married filing separately status is shut out of both credits.

The AOTC adds several student-specific requirements. The student must be pursuing a degree or other recognized credential, enrolled at least half-time for at least one academic period beginning during the tax year, and not yet have completed four years of post-secondary education. Schools set their own academic periods, which can be semesters, trimesters, quarters, or summer sessions.¹⁴

The LLC has none of those constraints. The student needs to be taking courses at an eligible institution to earn a credential or improve job skills, and that is essentially the whole test.²

Income Limits

Both credits phase out based on modified adjusted gross income (MAGI). For single filers, the phase-out begins at $80,000 and ends at $90,000. For joint filers, it runs from $160,000 to $180,000.⁵ Income inside that band produces a reduced credit; income above it produces none. These thresholds are fixed by statute and do not adjust for inflation.

Which Expenses Count

Tuition and mandatory fees required for enrollment qualify for both credits. Student activity fees count only if the school requires them as a condition of enrollment.⁶

Books, supplies, and equipment are treated differently by each credit. Under the AOTC, required course materials qualify even if you buy them from a third-party retailer instead of the campus bookstore.⁴ Under the LLC, course materials qualify only when the school requires you to pay for them directly as a condition of enrollment.³

Neither credit covers room and board, insurance, medical expenses, transportation, or other personal living costs, even when the school requires them.⁶ Non-credit courses generally do not qualify either, unless the course is part of a program to improve job skills and you are claiming the LLC.

How Scholarships and 529 Plans Affect the Credit

Before running the credit math, subtract any tax-free educational assistance the student received. That includes the tax-free portions of scholarships, Pell Grants, employer-provided educational assistance, and veterans’ education benefits. What remains — your adjusted qualified education expenses — is what goes into the credit calculation.⁶

The same rule applies to 529 plan distributions: expenses paid with a tax-free 529 withdrawal generally cannot also be used to claim an education credit.⁷ You can split expenses on purpose, though. Room and board is a qualified 529 expense but never a qualified education-credit expense, so paying room and board out of the 529 while paying tuition out of pocket preserves the tuition dollars for the credit.

What Counts as an Eligible School

An eligible educational institution is any accredited college, university, vocational school, or other post-secondary institution that participates in federal student aid programs administered by the U.S. Department of Education.⁸ Most public and private nonprofit schools qualify, along with many for-profit and vocational institutions. You can check a specific school through the Department of Education’s Database of Accredited Post Secondary Institutions and Programs. Some foreign universities also qualify if they participate in federal student aid programs.

Forms You Need to Claim It

Your school issues Form 1098-T, which reports qualified tuition and related expenses paid during the calendar year. Box 1 shows the total payments received, and that number is the starting point for the credit calculation.⁹¹⁰ You will also need the school’s Employer Identification Number, which appears on the form.

Schools do not have to issue a 1098-T in every case. Nonresident alien students, students whose qualified expenses are fully covered by scholarships, and enrollees in non-credit courses may not receive one.¹⁰ A credit may still be available in those situations, but you will need to document expenses yourself with receipts and billing statements.

To claim either credit, complete Form 8863 and attach it to your Form 1040. Part I handles the refundable portion of the AOTC; Part II handles the non-refundable portions of both credits.¹¹¹² Keep receipts for textbooks, software, and other required course materials in case the IRS asks for verification.

If You Get a Tuition Refund After Filing

A later tuition refund or new tax-free assistance for the same expenses can pull back part of the credit you already claimed. You recalculate the adjusted qualified education expenses using the reduced number, refigure the credit, and report the difference as additional tax on the return for the year you received the refund.¹²

An example: you paid $8,000 in December for a January semester and claimed a $1,600 LLC. The next year, the school refunds $1,400 of that tuition. The recalculated credit is $1,320 (20 percent of $6,600), and $280 becomes additional tax on the following year’s return. If both the original payment and the refund relate to a semester starting in the first three months of the following year, you may be able to apply the reduction to that year’s expenses instead.¹²

Penalties for Improper Claims

An education credit claim the IRS finds improper can carry consequences beyond repaying the money. Reckless or intentional disregard of the AOTC rules triggers a two-year ban on claiming the credit. A fraudulent claim triggers a ten-year ban.¹³

After a disallowance for any reason beyond a simple math error, you have to file Form 8862 the next time you claim the AOTC.¹³ E-filed returns claiming the credit during an active ban period are rejected; an appeal during a ban period requires attaching Form 8862 to a paper return. Careful documentation the first time is cheaper than fixing a bad claim later.

1
Internal Revenue Service. American Opportunity Tax Credit
2
Internal Revenue Service. Lifetime Learning Credit
3
Internal Revenue Service. Education Credits – AOTC and LLC
4
Office of the Law Revision Counsel. 26 USC 25A – Education Credits
5
Internal Revenue Service. Education Credits – Questions and Answers
6
Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education
7
Internal Revenue Service. 529 Plans – Questions and Answers
8
Internal Revenue Service. Eligible Educational Institution
9
Internal Revenue Service. About Form 1098-T, Tuition Statement
10
Internal Revenue Service. Instructions for Forms 1098-E and 1098-T (2025)
11
Internal Revenue Service. About Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits)
12
Internal Revenue Service. Instructions for Form 8863 (2025)
13
Internal Revenue Service. Instructions for Form 8862