What Education Tax Benefits Can You Claim?
Navigate the tax code to lower your tax liability by leveraging various provisions designed to offset the costs of higher education and student loans.
The U.S. tax code provides several benefits to make education more affordable by reducing a taxpayer’s tax liability. Taxpayers can use these opportunities to offset costs for themselves, a spouse, or a dependent. The available benefits include tax credits, deductions, and tax-advantaged savings plans, each with its own set of rules.
Major Tax Credits for Higher Education
Tax credits provide a dollar-for-dollar reduction of your tax liability. The two primary credits available for higher education expenses are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Each targets different educational situations.
American Opportunity Tax Credit
The American Opportunity Tax Credit is for students pursuing their first four years of postsecondary education. For 2025, the AOTC allows a maximum annual credit of $2,500 per student. The calculation is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. The AOTC is partially refundable; if the credit reduces your tax liability to zero, you can have 40% of the remaining credit, up to $1,000, refunded.
To qualify, the student must be pursuing a degree or credential, be enrolled at least half-time for one academic period, and not have a felony drug conviction. To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less for single filers or $160,000 or less for those married filing jointly. The credit is gradually reduced for incomes between $80,000 and $90,000 for single filers ($160,000 and $180,000 for joint filers).
Lifetime Learning Credit
The Lifetime Learning Credit is broader in scope than the AOTC and can be used for undergraduate, graduate, and professional degree courses, as well as for courses taken to acquire job skills. There is no limit on the number of years you can claim the LLC. The credit is nonrefundable, meaning it can reduce your tax liability to zero, but you will not get any of it back as a refund.
The LLC is calculated as 20% of the first $10,000 in qualified education expenses, for a maximum of $2,000 per tax return, not per student. Eligibility does not require the student to be pursuing a degree or be enrolled at least half-time. The income limits for the LLC are the same as for the AOTC. A taxpayer cannot claim both the AOTC and the LLC for the same student in the same year.
Key Tax Deductions for Education
Tax deductions reduce the amount of your income that is subject to tax, which differs from a credit that directly reduces the tax you owe. The most prominent education deduction is for student loan interest.
Student Loan Interest Deduction
Taxpayers who paid interest on a student loan may deduct the amount paid, up to a maximum of $2,500 per year. This is an “above-the-line” deduction, so you do not need to itemize to claim it. The loan must have been taken out solely for qualified education expenses for yourself, your spouse, or a dependent.
For 2025, the deduction is reduced for single filers with a MAGI between $80,000 and $95,000 and for joint filers with a MAGI between $165,000 and $195,000. You cannot claim the deduction if your MAGI is above these ranges. If you paid $600 or more in interest, you should receive Form 1098-E from your lender.
Expired Tuition and Fees Deduction
The Tuition and Fees Deduction has expired and cannot be claimed for recent tax years. This was an above-the-line deduction for qualified tuition and fees.
Tax-Advantaged Savings Plans
The tax code provides for specific accounts to encourage saving for education. These plans offer tax-deferred growth and tax-free withdrawals for qualified expenses, making them a useful tool for long-term educational funding.
529 Plans
In a 529 plan, contributions are not federally deductible, but investments grow tax-deferred, and withdrawals are federally tax-free if used for qualified higher education expenses. Many states also offer a tax deduction or credit for contributions to their 529 plan. While there are no federal annual contribution limits, contributions are considered gifts.
In 2025, an individual can contribute up to $19,000 per beneficiary without gift tax issues. A special rule allows “superfunding,” where you can make five years’ of contributions at once—up to $95,000 for an individual or $190,000 for a married couple. A recent change also allows tax-free rollovers of up to a lifetime maximum of $35,000 from a 529 plan to a Roth IRA for the beneficiary, subject to certain conditions.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts (ESAs) are another tax-advantaged option. Like 529 plans, earnings grow tax-free, and withdrawals for qualified expenses are also tax-free. A key difference is that Coverdell funds can be used for qualified elementary and secondary school expenses, not just higher education.
Coverdell ESAs have much lower contribution limits; the total for a beneficiary cannot exceed $2,000 per year from all sources. For 2025, the ability to contribute is reduced for single filers with a MAGI between $95,000 and $110,000 and for joint filers with a MAGI between $190,000 and $220,000. Contributions must stop when the beneficiary turns 18, and the funds must be used by age 30.
Employer-Provided Educational Assistance
An employer can provide up to $5,250 per employee each year in tax-free educational assistance. This amount is not subject to income or payroll taxes. The assistance can be used for a wide range of educational expenses, including tuition, fees, books, and supplies for undergraduate or graduate-level studies.
A provision extended through the end of 2025 also allows this tax-free assistance to be used for payments on an employee’s qualified student loans. To qualify, the employer must have a formal written educational assistance plan. Any assistance provided above the $5,250 annual limit is considered taxable income to the employee.
Required Information and Tax Forms
To claim education tax benefits, taxpayers need specific documentation and must understand what qualifies as an expense. The primary document from educational institutions is Form 1098-T.
Form 1098-T, Tuition Statement
Eligible educational institutions are required to issue Form 1098-T, Tuition Statement, to students by January 31. Box 1 of the form shows the total amount of payments received for qualified tuition and related expenses, while Box 5 reports scholarships or grants.
The amounts on Form 1098-T may not reflect the total expenses you can claim. The form does not include costs for books or supplies unless they were paid directly to the institution. You must use your own financial records to determine the total amount of qualified expenses paid.
Qualified Higher Education Expenses
The definition of “Qualified Higher Education Expenses” varies by benefit. For the American Opportunity Tax Credit, qualified expenses include tuition, fees, and course materials like books and supplies, regardless of where they are purchased. For the Lifetime Learning Credit, qualified expenses are limited to tuition and fees required for enrollment.
Expenses that are never qualified for these credits include room and board, transportation, insurance, and medical expenses. You must keep detailed records, such as receipts, to substantiate any expenses claimed that are not on Form 1098-T.