Education Credits and Tax Reform: What Changed?
Navigate the current rules for education tax benefits following recent tax reform. Learn what key provisions were preserved and how savings options were expanded.
Recent tax reform, particularly the Tax Cuts and Jobs Act (TCJA), preserved the core tax credits for higher education. The legislation also introduced modifications to education savings plans, altering how families can use these funds to manage the costs of education.
The American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a tax benefit for those pursuing higher education. To claim this credit, the student must be in their first four years of postsecondary education, be enrolled at least half-time for one academic period during the tax year, and be working towards a degree or other recognized credential. The student also cannot have a felony drug conviction.
The AOTC provides a maximum annual credit of $2,500 per eligible student, calculated as 100% of the first $2,000 in qualified education expenses and 25% of the next $2,000. Qualified expenses include tuition, fees, and required course materials. The credit is partially refundable, meaning a taxpayer can receive up to $1,000 as a refund even if they owe no tax.
Taxpayers must meet income requirements to claim the full credit. For 2025, the AOTC begins to phase out for individuals with a modified adjusted gross income (MAGI) between $80,000 and $90,000, and for married couples filing jointly with a MAGI between $160,000 and $180,000. The TCJA made the AOTC a permanent tax credit.
The Lifetime Learning Credit
The Lifetime Learning Credit (LLC) offers a tax benefit for education expenses. Unlike the AOTC, there is no limit on the number of years the LLC can be claimed. It is available for undergraduate, graduate, and professional degree courses, as well as for courses taken to acquire or improve job skills.
The LLC is calculated as 20% of the first $10,000 in qualified education expenses, up to a maximum of $2,000 per tax return. This limit applies per taxpayer, not per student. Qualified expenses for the LLC are limited to tuition and fees required for enrollment at an eligible educational institution.
A distinction of the LLC is that it is a nonrefundable credit, meaning it can reduce a tax liability to zero, but no portion is paid out as a refund. The income limitations for claiming the LLC are the same as those for the AOTC, and the TCJA left the LLC’s structure unchanged.
Expanded Use of 529 Plans
A 529 plan is a tax-advantaged savings vehicle designed to encourage saving for future education costs. Contributions to these plans may grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses. These plans are sponsored by states or educational institutions.
The Tax Cuts and Jobs Act allows for tax-free withdrawals of up to $10,000 per year, per beneficiary, to pay for tuition at elementary or secondary public, private, or religious schools.
The SECURE Act of 2019 added two new qualified expenses: costs for registered apprenticeship programs and payments on qualified student loans. Families can use up to a lifetime limit of $10,000 to repay the principal and interest on student loans for the 529 beneficiary and each of their siblings.
The SECURE 2.0 Act of 2022 created an option to roll over unused 529 funds into a Roth IRA for the plan’s beneficiary. Up to a lifetime maximum of $35,000 can be moved from a 529 account to a Roth IRA tax-free and penalty-free. These rollovers are subject to annual Roth IRA contribution limits and the condition that the 529 account has been open for at least 15 years.
Information Needed to Claim Education Benefits
A primary document for claiming education tax benefits is Form 1098-T, Tuition Statement, provided by the educational institution. This form reports the total amount of qualified tuition and related expenses paid during the calendar year in Box 1 and any scholarships or grants received in Box 5.
In addition to Form 1098-T, taxpayers should keep their own records of payments. This includes receipts for any qualified expenses not billed by the institution, such as required books or equipment purchased from an outside vendor.
The information from these documents is used to complete Form 8863, Education Credits. To fill out this form, you will need the student’s name and taxpayer identification number (TIN), the school’s name and employer identification number (EIN), and the categorized amounts of qualified expenses paid.
Process for Claiming Credits on Your Tax Return
After calculating the credit amount on Form 8863, the form must be filed with your annual tax return. Form 8863 must be attached to your Form 1040, U.S. Individual Income Tax Return, to claim either the American Opportunity Tax Credit or the Lifetime Learning Credit.
If you use e-filing software, the program will guide you through completing Form 8863 and will automatically attach it to your electronic submission of Form 1040.
For those who file by mail, a physical copy of the completed Form 8863 must be included with the signed Form 1040. It is not necessary to attach Form 1098-T to your return, but you must keep it for your records.