Education credit basics for tax planning

College costs keep climbing, and education tax credits remain one of the most powerful tools tax professionals can use to reduce a client’s tax liability. The challenge isn’t knowing the credits exist. It’s understanding how eligibility and coordination rules affect whether the credit actually delivers savings.

The two main education tax credits

There are two education credits under §25A that apply to post-secondary education.

• The American opportunity tax credit (AOTC) provides up to $2,500 per eligible student for qualified education expenses during the first four years of post-secondary education. Up to 40% of the credit, capped at $1,000, may be refundable.
• The lifetime learning credit (LLC) provides up to $2,000 per return for qualified education expenses. Unlike the AOTC, the LLC is available for an unlimited number of years and can apply to undergraduate, graduate or job-skill courses. The LLC is nonrefundable.

Only one credit can be claimed per student in the same year. If a taxpayer has multiple eligible students, different credits may be used for different students.

The impact of income levels and filing status

Both credits phase out based on modified adjusted gross income (MAGI). 

• For single filers, head of household (HOH) and qualifying surviving spouse (QSS), the phaseout begins at $80,000 and ends at $90,000. 
• For married filing jointly (MFJ), the phaseout range is $160,000 to $180,000.
• Married filing separately (MFS) taxpayers aren’t eligible for either credit. 

There’s also no carryforward for unused credits, which makes timing and eligibility especially important when planning.

Which education expenses qualify?

Qualified education expenses generally include tuition and fees, along with required course materials. 

• The AOTC allows course materials even if they aren’t purchased directly from the institution. 
• The LLC is more restrictive, allowing course materials only if paid to the institution as part of enrollment.

Expenses that don’t qualify include room and board, insurance, transportation, and personal living expenses.

Education assistance reduces eligible expenses. Scholarships, grants, employer-provided education assistance, veterans’ benefits and distributions from §529 plans or Coverdell education savings accounts all reduce the expenses available for credits. The same expenses also can’t be used for more than one tax benefit.

Form 1098-T and Form 8863 mechanics

Education credits are calculated on Form 8863, Education Credits, using information from Form 1098-T, Tuition Statement. The credit is claimed in the year expenses are paid, including amounts paid for academic periods that begin in the first three months of the following year.

A Form 1098-T isn’t required in every situation, but it’s often the starting point for determining eligible expenses. Boxes reporting payments, scholarships or grants, adjustments, reimbursements and refunds can materially affect the credit calculation.

For tax years beginning after 2025, claiming either education credit requires valid Social Security numbers (SSNs) for the taxpayer, any spouse on the return and each eligible student, all issued by the return’s due date. Individual taxpayer identification numbers (ITINs) no longer qualify as valid identification numbers, and the educational institution’s employer identification number (EIN) must also be reported. If these requirements aren’t met, the credit is denied for that year, making advance planning critical.

Dependency decisions present planning opportunities

One of the most common planning questions is whether parents should claim a college student as a dependent.

• If a student is claimed as a dependent, only the taxpayer claiming the student can claim the education credit. 
• If the student isn’t claimed, the student may be eligible to claim the credit themselves.
• Not claiming a dependent doesn’t automatically make the student an independent taxpayer. The student must still meet all eligibility rules for the credit. 

For example, parents with income above the education credit phaseout may choose not to claim a college student as a dependent. By doing so, the student may qualify for the AOTC and potentially receive up to $1,000 from the refundable portion, even though the parents give up the $500 other dependent credit (ODC). 

This decision to claim or not claim the student requires careful analysis of income levels, filing status and the overall tax impact for the family.

Coordinating education credits with other tax benefits

Education credits rarely exist in isolation. Student loan interest deductions, tax-free scholarships, employer assistance and §529 plan distributions all interact with the credits.

The timing of tuition payments and how expenses are allocated across education benefits can materially change the outcome. Choosing which taxpayer claims the student is often where planning produces the greatest value. These coordination rules are often where planning delivers the greatest value.

NATP’s Education Credit Basics webinar (Feb. 24, 2026, at 2:00 p.m. CT and on demand) builds on the concepts covered here, walking through eligibility, required forms and credit calculations, with planning considerations illustrated through practical examples. It’s part one of a two-part webinar series designed to help you confidently navigate education credits during filing season and beyond.

For a deeper technical walk-through, including examples and a step-by-step Form 8863 calculation, NATP members can additionally reference the TAXPRO article “The 411 on Education Tax Credits,” which breaks down both credits using real-world scenarios.