What Student Tax Benefits Can I Claim?

The United States tax code provides several benefits to help offset the costs of higher education, designed to reduce the financial burden on students and their families. The support comes primarily in two forms: tax credits, which directly reduce the amount of tax owed, and tax deductions, which lower the amount of income subject to tax. These benefits are not automatic and require taxpayers to meet specific criteria related to income, enrollment status, and the types of expenses they incur.

Primary Education Tax Credits

The American Opportunity Tax Credit (AOTC) is a benefit for students in their first four years of higher education. It is calculated as 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000, allowing for a maximum annual credit of $2,500 per eligible student. A notable feature of the AOTC is its partial refundability; if the credit reduces a taxpayer’s liability to zero, 40% of the remaining credit amount, up to $1,000, can be received as a refund.

To qualify for the AOTC, the student must be pursuing a degree or other recognized education credential and be enrolled at least half-time for at least one academic period in the tax year. A taxpayer cannot claim the AOTC if the student has already completed four years of postsecondary education or has a felony drug conviction. For the 2025 tax year, the AOTC begins to phase out for single filers with a modified adjusted gross income (MAGI) over $80,000 and is completely phased out at $90,000. For joint filers, the phase-out range is $160,000 to $180,000.

The Lifetime Learning Credit (LLC) offers a broader, nonrefundable tax benefit. It can be used for undergraduate, graduate, and professional degree courses, as well as for courses taken to acquire or improve job skills. Unlike the AOTC, there is no limit on the number of years the LLC can be claimed, and the student does not need to be enrolled at least half-time.

The LLC is calculated as 20% of the first $10,000 in qualified education expenses, for a maximum credit of $2,000 per tax return. This limit applies per return, not per student, meaning that even if a taxpayer pays for multiple students’ expenses, the maximum credit they can claim is $2,000. The income limitations for the LLC are the same as for the AOTC. A taxpayer must choose between the AOTC and the LLC for each student in a given year, as they cannot claim both credits for the same student simultaneously.

Key Education Related Deductions

A tax deduction available for education is the student loan interest deduction. This benefit allows taxpayers to deduct the interest they paid on a qualified student loan during the year. It is an “above-the-line” deduction, which means it can be claimed even if the taxpayer does not itemize their deductions. This feature makes it accessible to a wider range of individuals who are repaying their educational debt.

To be eligible for this deduction, the taxpayer must have paid interest on a loan taken out solely to pay for qualified education expenses. The taxpayer must be legally obligated to pay the interest on the loan and cannot be claimed as a dependent on someone else’s tax return. The maximum amount of interest that can be deducted in a year is $2,500. For the 2025 tax year, the deduction begins to phase out for single filers with a MAGI between $85,000 and $100,000 and for joint filers with a MAGI between $170,000 and $200,000.

Taxable vs Nontaxable Education Assistance

The tax treatment of financial aid depends on the source of the funds and how they are used. Scholarships, fellowships, and grants are tax-free for students who are candidates for a degree. The funds must be used to pay for qualified education expenses, which include tuition and fees, as well as books, supplies, and equipment that are required for courses.

Any portion of a scholarship, fellowship, or grant used for non-qualified expenses is considered taxable income. These non-qualified expenses include costs such as room and board, travel, and optional equipment. The student is responsible for reporting this amount on their tax return, which requires careful record-keeping to separate the use of funds between qualified and non-qualified expenses.

An employee can receive up to $5,250 in educational assistance from their employer on a tax-free basis each year. This benefit can be used for both undergraduate and graduate-level courses and covers expenses like tuition and fees. Any amount received above this $5,250 limit is considered taxable income to the employee.

Qualified tuition programs, known as 529 plans, are another source of tax-advantaged educational funding. These plans allow for tax-free growth of investments and tax-free withdrawals. Distributions from a 529 plan are not subject to federal income tax as long as the money is used to pay for qualified higher education expenses. These expenses can include tuition, fees, books, supplies, equipment, and room and board for students enrolled at least half-time.

Claiming Education Benefits on Your Tax Return

To claim education tax credits, taxpayers must gather the necessary documentation. The primary document is Form 1098-T, Tuition Statement, which is issued by the educational institution. This form reports the amount of tuition and related expenses paid during the year, as well as any scholarships or grants received.

In addition to Form 1098-T, taxpayers should keep detailed records of any qualified expenses not reported on the form. This includes receipts for required books, supplies, and equipment. These records are necessary to accurately calculate the total amount of qualified expenses and to provide proof if the IRS has questions about the claimed credits.

The primary form for claiming education credits is Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). Taxpayers will use the information from Form 1098-T and their personal expense records to complete this form. The final credit amount calculated on Form 8863 is then transferred to the main Form 1040.

For the student loan interest deduction, taxpayers who paid $600 or more in student loan interest will receive Form 1098-E, Student Loan Interest Statement, from their loan servicer. The deductible amount, up to the $2,500 limit, is reported directly on Schedule 1 of Form 1040.