Back-to-school season is a good time to remind clients that education expenses can have tax implications.
The American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) remain two important federal tax benefits for higher education. Recent law changes also expand some education-related tax benefits, including qualified expenses for 529 plans and employer assistance with student loans.
Here is what tax professionals can share with clients:
American Opportunity Tax Credit
The AOTC is a partially refundable credit for qualified education expenses paid for an eligible student during the first four years of higher education.
The credit provides:
- Up to $2,500 per eligible student
- A refundable portion of up to 40% of the credit, or $1,000
- Coverage for qualified tuition, required fees, and course materials
- Availability when the student is enrolled at least half-time for at least one academic period and is pursuing a degree or other recognized education credential
The full credit is generally available when modified adjusted gross income (MAGI) is $80,000 or less, or $160,000 or less for married taxpayers filing jointly. The credit phases out between $80,000 and $90,000, or between $160,000 and $180,000 for married taxpayers filing jointly.
Taxpayers with MAGI above those limits cannot claim the credit.
The student also cannot have completed the first four years of postsecondary education before the beginning of the applicable tax year or have claimed the AOTC or former Hope credit for more than four tax years.
Lifetime Learning Credit
The LLC can help clients with undergraduate, graduate, professional degree, and job-skills courses.
Unlike the AOTC, the LLC does not require the student to pursue a degree or other recognized education credential. A student can qualify by taking one or more courses at an eligible educational institution.
Key features include:
- A maximum credit of $2,000 per return
- A credit equal to 20% of up to $10,000 of qualified expenses
- No limit on the number of years the credit can be claimed
- Availability for courses used to acquire or improve job skills
- No half-time enrollment requirement
The LLC is nonrefundable, so it can reduce income tax liability to zero but does not generate a refund by itself.
The same MAGI phaseout ranges that apply to the AOTC also apply to the LLC: $80,000 to $90,000 for most eligible filing statuses and $160,000 to $180,000 for married taxpayers filing jointly.
Know Which Education Expenses Qualify
Not every college expense qualifies for an education credit.
For the AOTC, qualified education expenses can include tuition, certain required fees, and course materials such as books, supplies, and equipment needed for a course of study. Those course materials do not have to be purchased from the educational institution.
For the LLC, books, supplies, and equipment generally qualify only when the student must pay the institution for them as a condition of enrollment or attendance.
Expenses that generally do not qualify for either credit include:
- Room and board
- Insurance
- Medical expenses, including student health fees
- Transportation
- Similar personal or living expenses
Tax professionals should also watch for expenses paid with tax-free educational assistance. The same education expense generally cannot be used for more than one federal tax benefit.
Review Form 1098-T Before Claiming a Credit
Form 1098-T, Tuition Statement, is an important part of determining eligibility for education credits.
Generally, a student must receive Form 1098-T from an eligible educational institution for the taxpayer to claim the AOTC or LLC. Exceptions apply in certain situations.
Do not rely on Form 1098-T alone to determine the credit. Tax professionals may also need to review:
- School account statements
- Receipts for books and course materials
- Scholarship and grant information
- Records showing who paid the expenses
- Enrollment information
Clients should review Form 1098-T and contact the educational institution when information appears incorrect.
Claiming Education Credits on Form 8863
Taxpayers claim the AOTC and LLC using Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).
A taxpayer cannot claim both credits for the same student and the same expenses. However, a taxpayer may be able to claim different education credits for different students on the same return when each student meets the applicable requirements.
Common issues to watch for include:
- Claiming the AOTC for more than four tax years
- Using expenses that do not qualify
- Using the same expenses for multiple education tax benefits
- Failing to reduce expenses by certain tax-free educational assistance
- Missing or incorrect taxpayer or student information
- Overlooking the different enrollment requirements for the AOTC and LLC
In Drake Tax®, enter education credit information on screen 8863. Form 1098-T can assist with entering the information. Drake Tax generates Form 8863 when the taxpayer qualifies for the benefit.
New Rules Expand Some 529 Plan Uses
Recent legislation also changes how families can use tax-advantaged 529 plans.
Public Law 119-21, enacted July 4, 2025, expanded the definition of qualified higher education expenses to include certain qualified postsecondary credentialing expenses.
Depending on the requirements, qualified expenses can include:
- Tuition and fees for recognized postsecondary credential programs
- Required books, supplies, and equipment
- Certain testing fees required to obtain or maintain a recognized postsecondary credential
- Certain continuing education expenses needed to maintain a credential
These changes generally apply to qualifying 529 plan distributions made after July 4, 2025.
For clients pursuing professional certifications, licenses, or other recognized credentials, the expanded rules may provide another education planning opportunity.
Employer Student Loan Assistance Is Now Permanent
Another important change affects employer educational assistance programs.
Internal Revenue Code section 127 allows an employer with a qualifying educational assistance program to provide certain education benefits to employees without including the benefit in the employee’s gross income.
For 2025 and 2026, up to $5,250 per employee per calendar year can generally be excluded from income. Qualifying assistance can include certain tuition, fees, books, supplies, and equipment.
Employer payments of principal or interest on an employee’s qualified education loans can also qualify.
Previously, the student loan provision was scheduled to expire after 2025. Public Law 119-21 made the provision permanent for payments made after December 31, 2025. The $5,250 exclusion is also scheduled for inflation adjustments for tax years beginning after 2026.
This gives tax professionals another planning topic to discuss with clients who have access to employer educational assistance programs.
Back-to-school season gives tax professionals an opportunity to discuss education expenses before tax season begins.
Encourage clients to keep tuition statements, receipts, scholarship records, employer benefit information, and other education-related documents. Good records can make it easier to determine which expenses qualify and prevent the same expense from being used for more than one tax benefit.
Education benefits can extend beyond the AOTC and LLC. With expanded 529 plan rules and permanent employer student loan assistance provisions, reviewing the full picture can help clients understand the federal tax benefits that may apply to their education costs.
Disclaimer: This article is for informational purposes only and not legal or financial advice.
Sources
Primary Source
Internal Revenue Service, IRS webpage, “Education credits – AOTC and LLC,” eligibility and credit comparison sections. Current IRS guidance covering eligibility, enrollment requirements, credit amounts, and restrictions for the American Opportunity Tax Credit and Lifetime Learning Credit.
https://www.irs.gov/credits-deductions/individuals/education-credits-aotc-and-llc
Internal Revenue Service, Publication 970, Tax Benefits for Education, Chapters 2 and 3. Guidance covering the American Opportunity Credit, Lifetime Learning Credit, qualified education expenses, and education benefit coordination rules.
https://www.irs.gov/publications/p970
Internal Revenue Service, Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), and Instructions for Form 8863. Used to calculate and claim the AOTC and LLC.
https://www.irs.gov/forms-pubs/about-form-8863
Public Law 119-21, sections 70412 and 70413, July 4, 2025. Section 70412 makes qualified employer student loan payments under Internal Revenue Code section 127 permanent and provides for inflation adjustments after 2026. Section 70413 expands qualified expenses for purposes of section 529.
https://www.congress.gov/119/plaws/publ21/PLAW-119publ21.htm
Internal Revenue Service, IR-2026-55, “IRS updates frequently asked questions about section 127 educational assistance programs,” April 20, 2026. Provides updated guidance on employer educational assistance programs following Public Law 119-21.
Practical Guidance
Drake Software Knowledge Base, article 12153, “Drake Tax – 8863: Education Benefits,” Form 8863 data entry, qualified education expenses, and credit comparison sections, last updated March 24, 2026. Explains how tax professionals enter and review AOTC and LLC information in Drake Tax.
