How to Claim an Education Tax Credit: Eligibility and Key Steps

Education tax credits help lower the cost of higher education by directly reducing the amount of taxes owed. Unlike deductions, which lower taxable income, these credits decrease tax liability, making them valuable for students and families managing college expenses.

To benefit, taxpayers must understand which expenses qualify, how to apply, and income limits that affect eligibility.

Eligibility Requirements

To claim an education tax credit, the student must be enrolled at an eligible institution—typically an accredited college, university, or vocational school participating in federal student aid programs. The student must also be pursuing a degree or recognized credential, though some credits apply to job-related courses.

The taxpayer claiming the credit must have a valid Social Security number or Individual Taxpayer Identification Number and cannot be listed as a dependent on another person’s tax return. If a parent or guardian claims the student as a dependent, only they can claim the credit. The student must be enrolled for at least one academic term during the tax year.

Income limits affect eligibility, as credits phase out at higher income levels. For 2024, the American Opportunity Tax Credit (AOTC) begins to phase out for single filers with a modified adjusted gross income (MAGI) above $80,000 and is unavailable at $90,000. For married couples filing jointly, the phase-out starts at $160,000 and ends at $180,000. The Lifetime Learning Credit (LLC) follows the same limits.

Qualified Educational Expenses

Education tax credits apply to specific costs required for enrollment or attendance at an eligible institution.

Tuition

Tuition is the primary eligible expense, covering enrollment in undergraduate, graduate, or professional degree programs. Payments must be made directly to the school or through an official billing system. Tuition covered by tax-free assistance, such as scholarships or employer reimbursements, cannot be counted toward the credit.

Prepaid tuition plans, like 529 plans, qualify only if used for eligible expenses. If tuition is reduced by scholarships or grants, the amount eligible for the credit must be adjusted. Non-credit courses generally do not qualify unless required for a degree or job-related training.

Fees

Mandatory fees required for enrollment qualify for education tax credits. These may include student activity fees, lab fees, and technology fees if necessary for coursework. Optional fees, such as parking permits, gym memberships, or health insurance, do not qualify.

Some schools combine tuition and fees, so reviewing billing statements is essential. Fees required for all students as a condition of enrollment are generally eligible, while extracurricular fees do not meet IRS criteria.

Course Materials

Books, supplies, and equipment qualify if required for enrollment or a specific course. The AOTC allows these costs even if purchased from third-party retailers.

The LLC has stricter rules—course materials must be purchased directly from the institution to qualify. Independently bought books or supplies may not be eligible.

Computers and software qualify only if explicitly required by the school or a course. General-purpose items, like a personal laptop, do not qualify unless mandated for all students.

Steps for Claiming the Credit

Filing for an education tax credit begins with gathering documentation. The 1098-T form, issued by schools by January 31, reports tuition and fees billed, as well as scholarships or grants received. Since the 1098-T may not always reflect actual payments, taxpayers should cross-check with personal records. Receipts for textbooks and other required materials should also be collected.

Next, taxpayers complete IRS Form 8863 to calculate the credit amount. This form is attached to Form 1040 when filing a tax return. Tax software can assist, but reviewing calculations is crucial to avoid errors such as claiming expenses reimbursed by an employer or failing to adjust for refunds. Mistakes can delay processing or trigger an audit.

Taxpayers should also compare education tax credits with the tuition and fees deduction, which reduces taxable income rather than directly lowering tax liability. Depending on income and tax situation, the deduction may offer greater benefits. If multiple students in a household qualify, careful planning maximizes savings, as the AOTC has a per-student limit while the LLC applies per return.

Income Threshold Considerations

Education tax credits target low- and middle-income households, so high earners may be ineligible. Managing MAGI can help taxpayers stay within the limits.

Contributing to tax-advantaged accounts, such as traditional IRAs or 401(k)s, reduces taxable income and can help maintain eligibility. Health Savings Account (HSA) contributions or deductions for self-employed health insurance can also lower MAGI. Deferring end-of-year bonuses or capital gains to the following tax year may help.

For married couples filing jointly, combined income can push them over the threshold. Filing separately could preserve a credit for one spouse, but this approach has trade-offs, including the loss of other tax benefits like the Earned Income Tax Credit (EITC). Taxpayers should assess whether the overall tax impact justifies the potential education credit gain.

Employer-Paid Tuition Factors

Many employers offer tuition assistance programs, with the IRS allowing up to $5,250 per year in tax-free tuition assistance under Section 127 of the Internal Revenue Code. Amounts beyond this are considered taxable income and must be reported on the employee’s W-2.

If an employer fully covers tuition, those expenses cannot be claimed for a tax credit. However, if tuition costs exceed the employer’s reimbursement, the remaining amount may still qualify for the AOTC or LLC. For example, if an employer provides $4,000 in assistance and tuition totals $8,000, the remaining $4,000 could be used to claim a credit.

If tuition assistance is taxable, employees may offset the additional income by claiming an education tax credit. Careful tax planning determines whether the credit provides a greater benefit than deductions for work-related education expenses. Employees receiving tuition assistance should review their tax situation to maximize available benefits while complying with IRS rules.