Education Tax Credits for 2025: American Opportunity Credit and Lifetime Learning Credit
Key Takeaways
- Education tax credits can reduce your federal income tax: The American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) help eligible students and families offset qualifying higher education expenses.
- The American Opportunity Tax Credit offers up to $2,500 per student: It generally applies to the first four years of postsecondary education, and up to $1,000 may be refundable for eligible taxpayers.
- The Lifetime Learning Credit provides up to $2,000 per tax return: It can benefit eligible undergraduate students, graduate students, and individuals taking courses to acquire or improve job skills.
- Income limits and eligibility requirements apply: Both credits are subject to modified adjusted gross income (MAGI) limitations, enrollment requirements, and other IRS rules.
- Accurate documentation is essential: Taxpayers should review Form 1098-T, qualified education expenses, scholarships, and dependency rules before claiming education credits using IRS Form 8863.
Higher education can be expensive, whether you're attending a university, pursuing a college degree, taking professional courses, or helping a dependent pay for school. Tuition, enrollment fees, textbooks, and other educational expenses can place a significant burden on students and families.
Fortunately, the federal government offers education tax credits that may help eligible taxpayers reduce their income tax liability and, in some circumstances, increase their tax refund.
For the 2025 tax year, generally filed in 2026, the two main federal education tax credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
Although both credits provide tax benefits for qualifying educational expenses, they have different eligibility requirements, income limitations, and maximum credit amounts.
Understanding these differences can help students, parents, and other eligible taxpayers determine which education tax credit may provide the greatest benefit.
What Is an Education Tax Credit?
An education tax credit is a federal income tax benefit that helps eligible taxpayers offset certain higher education expenses.
Unlike a tax deduction, which reduces taxable income, a tax credit generally reduces federal income tax liability directly.
For example, suppose you owe $3,000 in federal income tax and qualify for a $2,500 education tax credit.
If the full credit can be used against your tax liability, your federal income tax could be reduced to $500.
Some education tax credits are partially refundable, meaning eligible taxpayers may receive a refund even when part of the credit exceeds their income tax liability.
However, refundability depends on the specific credit and the taxpayer's eligibility.
What Education Tax Credits Are Available for 2025?
There are two primary federal education tax credits available for qualifying higher education expenses:
· American Opportunity Tax Credit (AOTC)
· Lifetime Learning Credit (LLC)
Both credits are generally claimed using IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), but they apply to different educational circumstances.
American Opportunity Tax Credit vs. Lifetime Learning Credit
Feature / American Opportunity Tax Credit / Lifetime Learning Credit
Feature: Maximum credit / American Opportunity Tax Credit: $2,500 per eligible student / Lifetime Learning Credit: $2,000 per tax return.
Feature: Refundable / American Opportunity Tax Credit: Up to $1,000 may be refundable / Lifetime Learning Credit: Nonrefundable.
Feature: Eligible years / American Opportunity Tax Credit: Generally first four years of postsecondary education / Lifetime Learning Credit: No limit on number of years.
Feature: Enrollment / American Opportunity Tax Credit: At least half-time for an eligible academic period / Lifetime Learning Credit: One or more qualifying courses.
Feature: Degree requirement / American Opportunity Tax Credit: Pursuing a degree or recognized educational credential / Lifetime Learning Credit: Degree not necessarily required.
Feature: Qualified expenses / American Opportunity Tax Credit: Tuition, required fees, and qualifying course materials / Lifetime Learning Credit: Tuition and required enrollment fees, including certain required course materials.
Feature: Graduate education / American Opportunity Tax Credit: Generally not available after completing the first four years / Lifetime Learning Credit: May qualify.
Feature: Credit calculation / American Opportunity Tax Credit: 100% of first $2,000 plus 25% of next $2,000 / Lifetime Learning Credit: 20% of up to $10,000.
Feature: Income limitations / American Opportunity Tax Credit: Apply / Lifetime Learning Credit: Apply.
The American Opportunity Tax Credit generally provides a larger potential benefit for eligible undergraduate students, while the Lifetime Learning Credit may be useful for graduate students, part-time students, and individuals taking courses to improve job skills.
What Is the American Opportunity Tax Credit (AOTC)?
The American Opportunity Tax Credit is a federal education credit designed to help eligible students and families pay for the first four years of postsecondary education.
For the 2025 tax year, the maximum credit is $2,500 per eligible student.
The credit is calculated as:
· 100% of the first $2,000 in qualifying education expenses.
· 25% of the next $2,000 in qualifying education expenses.
Therefore, a taxpayer generally needs at least $4,000 in qualifying expenses for an eligible student to calculate the maximum $2,500 credit.
Is the American Opportunity Tax Credit Refundable?
The AOTC is partially refundable.
Up to 40% of the allowable credit, or a maximum of $1,000 per eligible student, may be refundable.
The remaining portion is nonrefundable and may reduce federal income tax liability, subject to the applicable rules.
Special restrictions apply to the refundable portion, including rules affecting certain students under age 24.
American Opportunity Tax Credit Example
Suppose a taxpayer pays $5,000 in qualified tuition, required fees, and eligible course materials for a dependent college student.
The potential credit calculation is:
AOTC Calculation: 100% of first $2,000 / Amount: $2,000.
AOTC Calculation: 25% of next $2,000 / Amount: $500.
AOTC Calculation: Maximum calculated AOTC / Amount: $2,500
If the taxpayer qualifies for the full credit, up to $1,000 may be refundable, while the remaining $1,500 is generally nonrefundable.
The actual tax benefit depends on income, tax liability, refundability restrictions, and other eligibility requirements.
Who Qualifies for the American Opportunity Tax Credit?
To qualify for the AOTC, the student generally must meet several requirements.
The student must:
· Be pursuing a degree or another recognized educational credential.
· Be enrolled at least half-time for at least one qualifying academic period beginning during the tax year.
· Not have completed the first four years of postsecondary education before the beginning of the tax year.
· Not have had the AOTC or former Hope Credit claimed for that student for four earlier tax years.
· Not have a federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.
The taxpayer claiming the credit must also meet applicable filing status, income, identification number, and other requirements.
What Expenses Qualify for the AOTC?
Qualified expenses generally include tuition and required enrollment fees paid to an eligible educational institution.
The AOTC may also include course materials needed for a course of study, such as:
· Textbooks
· Required supplies
· Certain equipment needed for coursework
Unlike the Lifetime Learning Credit, qualifying course materials for the AOTC do not always have to be purchased directly from the educational institution.
However, the expenses must satisfy the applicable IRS requirements.
Costs such as room and board, insurance, transportation, and personal living expenses generally do not qualify.
What Is the Lifetime Learning Credit (LLC)?
The Lifetime Learning Credit is a federal education tax credit available to eligible taxpayers who pay qualified education expenses for higher education.
Unlike the AOTC, the LLC is not limited to the first four years of postsecondary education.
It may be available for undergraduate education, graduate studies, professional education, and certain courses taken to acquire or improve job skills.
For the 2025 tax year, the maximum Lifetime Learning Credit is $2,000 per tax return.
How Is the Lifetime Learning Credit Calculated?
The LLC is calculated as 20% of up to $10,000 in qualified education expenses.
For example, if an eligible taxpayer pays $8,000 in qualifying tuition and fees, the potential credit would be:
$8,000 × 20% = $1,600
If qualified expenses total $10,000 or more, the maximum calculated credit is $2,000.
Lifetime Learning Credit Example
Consider a taxpayer who pays $12,000 in qualifying tuition for graduate school.
LLC Calculation / Amount
LLC Calculation: Qualified education expenses paid / Amount: $12,000.
LLC Calculation: Maximum expenses considered / Amount: $10,000.
LLC Calculation: Credit percentage / Amount: 20%.
LLC Calculation: Maximum calculated LLC / Amount: $2,000.
The Lifetime Learning Credit is nonrefundable.
This means it can reduce eligible federal income tax liability to zero, but it cannot independently create a refund when the credit exceeds the applicable tax liability.
Who Qualifies for the Lifetime Learning Credit?
To qualify for the LLC, the student generally must be enrolled at an eligible educational institution and taking qualifying higher education courses.
Courses may be taken to:
· Pursue a degree or recognized educational credential.
· Acquire new job skills.
· Improve existing job skills.
· Complete qualifying undergraduate or graduate education.
The LLC does not require the student to attend at least half-time.
There is also no limit on the number of tax years for which an eligible taxpayer may claim the credit.
However, income limitations and other eligibility requirements apply.
Income Limits for Education Tax Credits in 2025
Both the American Opportunity Tax Credit and the Lifetime Learning Credit are subject to modified adjusted gross income (MAGI) limitations.
For the 2025 tax year, the income phaseout ranges are:
Filing Status / MAGI Phaseout Range
Filing Status: Single, Head of Household, or Qualifying Surviving Spouse / MAGI Phaseout Range: $80,000–$90,000.
Filing Status: Married Filing Jointly / MAGI Phaseout Range: $160,000–$180,000.
Filing Status: Married Filing Separately / MAGI Phaseout Range: Not eligible.
For eligible taxpayers other than married joint filers, the credit generally begins to decrease when MAGI exceeds $80,000 and is eliminated at $90,000.
For married couples filing jointly, the phaseout generally begins above $160,000 and ends at $180,000.
These income limitations apply to both education credits.
The MAGI calculation for education credits may differ from the MAGI calculation used for other tax benefits.
Can Parents Claim Education Tax Credits for Their Children?
Yes. Parents may qualify for an education tax credit when they claim an eligible student as a dependent and meet the other applicable requirements.
For example, parents who claim their college student as a dependent may be eligible for the AOTC if the student meets the enrollment, educational, and other eligibility conditions.
The rules also address situations where someone else pays the student's tuition.
In certain circumstances, qualifying payments made by a third party are treated as paid by the student for purposes of the education credit rules.
The ability to claim the credit depends on dependency status and other requirements, not simply on whose bank account was used to make the payment.
Can Students Claim Education Credits on Their Own Tax Returns?
Yes, eligible students may be able to claim an education tax credit on their own federal income tax returns.
However, a student generally cannot claim an education credit if another taxpayer claims that student as a dependent.
If a student is eligible to be claimed as a dependent but is not actually claimed, special rules determine who may claim the education credit.
Additionally, certain students under age 24 may be ineligible for the refundable portion of the AOTC, even when they otherwise qualify for the credit.
These dependency and refundability rules should be reviewed carefully before filing.
What Is Form 1098-T?
Form 1098-T, Tuition Statement, is an information return generally issued by eligible educational institutions to report certain tuition-related information.
The form may include:
· Payments received for qualified tuition and related expenses.
· Scholarships and grants processed by the institution.
· Adjustments relating to prior-year amounts.
· Other relevant educational information.
Form 1098-T is commonly used when preparing education credit calculations.
However, the amount shown on Form 1098-T does not necessarily equal the amount eligible for an education tax credit.
Taxpayers may need additional records to determine which expenses qualify.
Certain exceptions also apply to the requirement that a student receive Form 1098-T.
What Is IRS Form 8863?
IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), is used to calculate and claim the AOTC or LLC.
The form generally requires information about:
· The eligible student.
· The educational institution.
· Qualified education expenses.
· Income limitations.
· Credit eligibility.
· Refundable and nonrefundable credit amounts, when applicable.
Form 8863 is filed with the taxpayer's federal income tax return.
The applicable credit amounts are transferred to Form 1040 and supporting schedules according to the IRS instructions.
How to Claim an Education Tax Credit for 2025
Taxpayers claiming education credits should follow a structured process.
Confirm Eligibility
Determine whether the student and taxpayer meet the requirements for the AOTC or LLC.
Review enrollment status, educational history, filing status, income limits, and dependency rules.
Gather Education Documents
Collect Form 1098-T, tuition statements, payment receipts, scholarship records, and documentation for qualifying course materials.
Calculate Qualified Expenses
Identify which expenses qualify for the specific credit.
Adjust expenses when required for tax-free scholarships, grants, employer-provided educational assistance, or other tax-free education benefits.
Complete Form 8863
Use Form 8863 to calculate the applicable education credit and determine any refundable and nonrefundable portions.
File Your Federal Tax Return
Include Form 8863 with Form 1040 or the applicable individual income tax return.
Keep supporting documents in case the IRS requests verification.
Can You Claim Both the AOTC and LLC?
You cannot claim both the American Opportunity Tax Credit and Lifetime Learning Credit for the same student in the same tax year.
However, a taxpayer may be able to claim the AOTC for one eligible student and the LLC for another eligible student on the same return, provided the applicable requirements are satisfied.
For example, parents with two qualifying dependents might claim the AOTC for an undergraduate student and the LLC for a graduate student.
The same education expenses cannot be used to claim more than one federal education tax benefit.
Can Scholarships Affect Education Tax Credits?
Yes. Scholarships, grants, and other tax-free educational assistance may affect the amount of expenses available for education tax credits.
Generally, qualified education expenses must be reduced by certain tax-free educational assistance used to pay those expenses.
For example, if a student receives a tax-free scholarship that pays qualifying tuition, the same tuition expense generally cannot also be used to calculate an education tax credit.
Special rules may allow certain scholarship allocations to be treated differently when permitted under the scholarship's terms and federal tax law.
Because these calculations can affect both the student's and the parents' tax returns, careful review is important.
Other Education-Related Tax Benefits
Education tax credits are not the only federal tax benefits that may help eligible students and families.
Student Loan Interest Deduction
Eligible taxpayers may deduct up to $2,500 in qualifying student loan interest, subject to income limits and other requirements.
This is generally an adjustment to income rather than an itemized deduction.
The deduction is separate from the AOTC and LLC.
529 Education Savings Plans
Qualified tuition programs, commonly called 529 plans, allow families to save for eligible education expenses.
Earnings may be distributed free of federal income tax when used for qualifying educational expenses, subject to applicable rules.
Contributions to a 529 plan are not deductible on the federal income tax return, although certain states offer contribution-related tax benefits.
Employer Educational Assistance
Some employers provide educational assistance benefits to eligible employees.
Under qualifying employer educational assistance programs, certain benefits may be excluded from the employee's taxable income, subject to applicable federal limits and requirements.
Tax-Free Scholarships and Fellowships
Certain scholarships and fellowship grants may be excluded from taxable income when the student and expenses satisfy the applicable requirements.
However, amounts used for room and board or other nonqualified expenses may be taxable.
Common Education Tax Credit Mistakes to Avoid
When claiming education credits, taxpayers should watch for several common errors.
Claiming both credits for the same student: The AOTC and LLC cannot both be claimed for the same student in the same tax year.
Ignoring income limitations: Taxpayers whose MAGI exceeds the applicable limits may receive a reduced credit or no credit.
Claiming nonqualified expenses: Room and board, transportation, and personal living expenses generally do not qualify.
Using expenses covered by tax-free assistance twice: Expenses paid with certain tax-free scholarships or grants generally cannot also support an education credit.
Overlooking dependency rules: The taxpayer eligible to claim the credit may depend on whether the student is claimed as a dependent.
Assuming the AOTC is always refundable: Special restrictions may prevent certain taxpayers, including some students under age 24, from receiving the refundable portion.
Failing to retain documentation: Taxpayers should maintain records supporting enrollment, qualifying expenses, and payments.
Which Education Tax Credit Is Better?
The American Opportunity Tax Credit may be more beneficial for eligible students in their first four years of postsecondary education because it provides a maximum credit of $2,500 per student and may be partially refundable.
The Lifetime Learning Credit may be more appropriate for graduate students, individuals pursuing continuing education, or taxpayers taking qualifying courses to improve job skills.
However, the better choice depends on the taxpayer's eligibility, income, educational expenses, tax liability, and other circumstances.
Comparing both options before filing can help ensure that eligible taxpayers claim the most appropriate available benefit.
Get Help Claiming Education Tax Credits for 2025
Education tax credits can provide meaningful savings for eligible students and families, but claiming them correctly requires understanding income limits, enrollment requirements, qualified expenses, and IRS reporting rules.
Whether you are paying college tuition for yourself, supporting a dependent student, or pursuing additional education to advance your career, reviewing the available credits can help you make informed tax decisions.
ContNow Tax Preparation LLC provides online individual tax preparation services, including assistance with education-related tax credits and deductions.
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