What Qualifies as IRS Education Expenses?
Understand how to use education costs to reduce your tax bill. This guide clarifies IRS requirements for qualifying expenses and the process for claiming benefits.
The Internal Revenue Service provides tax benefits to assist with the costs of higher education through tax credits and deductions. Credits directly lower the amount of tax owed, while deductions reduce the amount of income subject to tax. The availability of these benefits depends on factors such as income, the type of expenses paid, and the student’s enrollment status.
Defining Qualifying Education Expenses and Institutions
To utilize education tax benefits, payments must be for “qualified education expenses” at an “eligible educational institution.” An eligible educational institution is any accredited public, non-profit, or privately-owned postsecondary institution, such as a college, university, or vocational school, that can participate in a student aid program from the U.S. Department of Education.
Qualified education expenses are amounts paid for tuition and fees required for enrollment or attendance. For some tax benefits, this definition also includes costs for books, supplies, and equipment needed for a course of study, which do not have to be purchased from the school.
Costs for room and board, insurance, medical fees, transportation, and other personal living expenses are not qualified expenses. The IRS excludes these costs when calculating education tax benefits.
Tax Credits for Higher Education
The IRS offers two tax credits for higher education: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
The AOTC is for students in their first four years of higher education and provides a maximum annual credit of $2,500 per student. It is calculated on 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. The AOTC is also partially refundable, with up to $1,000 available even if no tax is owed.
To be eligible for the AOTC, a student must:
- Be pursuing a degree or other recognized education credential.
- Be enrolled at least half-time for one academic period during the tax year.
- Not have completed the first four years of higher education.
- Not have a felony drug conviction.
The Lifetime Learning Credit can be used for undergraduate, graduate, and professional degree courses, or for courses to acquire job skills. The LLC is a nonrefundable credit of 20% of the first $10,000 in expenses, for a maximum of $2,000 per tax return. For the LLC, a student does not need to be pursuing a degree or be enrolled at least half-time.
For 2025, both credits phase out for taxpayers with a modified adjusted gross income (MAGI) between $80,000 and $90,000 (single filers) or $160,000 and $180,000 (joint filers). A taxpayer cannot claim both the AOTC and LLC for the same student in the same year. To claim either credit, you cannot be claimed as a dependent on someone else’s return.
Tax Deductions for Education Costs
Beyond tax credits, the IRS allows a deduction for student loan interest. This permits taxpayers to subtract up to $2,500 in interest paid on a qualified student loan. This is an “above-the-line” deduction, meaning it can be taken even if the taxpayer does not itemize.
To qualify, the taxpayer must have paid interest on a loan taken out solely for qualified higher education expenses, be legally obligated to pay it, and not be claimed as a dependent. For 2025, this deduction is phased out for taxpayers with a MAGI between $80,000 and $95,000 ($165,000 and $195,000 for joint filers).
Another deduction exists for work-related education, but its availability is limited. The deduction for unreimbursed employee expenses is suspended for most individuals through 2025. However, it can still be claimed by certain individuals, including:
- Self-employed individuals
- Armed Forces reservists
- Qualified performing artists
- Fee-based state or local government officials
- Individuals with impairment-related work expenses
For those eligible, the education must be required by an employer or law to maintain a present job, or it must maintain or improve skills needed for the current work. Education to meet minimum requirements for a profession or to qualify for a new trade is not deductible.
The Tuition and Fees Deduction expired at the end of 2020 and is no longer available. Taxpayers who previously claimed it must now see if they qualify for the AOTC or LLC.
Required Information and Tax Forms
To claim education tax benefits, taxpayers must gather specific documentation. The primary document is Form 1098-T, Tuition Statement, which institutions must send by January 31 to students who paid qualified tuition. This form reports payments for tuition and related expenses, as well as scholarships or grants.
For those who paid student loan interest, the relevant document is Form 1098-E, Student Loan Interest Statement. Lenders send this form to anyone who paid $600 or more in interest, showing the total amount that can be used for the deduction.
Because Form 1098-T may not include all qualifying expenses, such as required books and supplies purchased elsewhere, keep receipts for these items as proof. All this information is used to complete Form 8863, Education Credits, which calculates the exact amount of the AOTC or LLC you can claim.
How to Claim Education Tax Benefits
The final step is to report the education tax benefits on the federal income tax return. The total credit amount calculated on Form 8863 is transferred to the appropriate line on Schedule 3 (Form 1040). Form 8863 must be attached to the Form 1040.
The student loan interest deduction is claimed as an adjustment to income. The total deductible amount, up to the $2,500 limit, is entered on Schedule 1 (Form 1040). This process reduces a taxpayer’s adjusted gross income, which can lower their overall tax liability.