Two of the most widely used credits — the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) — may offer significant opportunities to reduce a client’s federal income tax liability.
This article provides an overview of these credits, including qualified expenses, income limits, institutional reporting requirements, and common filing issues — so you can better support your clients this back-to-school season and beyond.
1. American Opportunity Tax Credit (AOTC)
The AOTC is a partially refundable credit available for up to four years of postsecondary education.
Key Features:
- Maximum credit: $2,500 per eligible student
- 40% refundable (up to $1,000)
- Covers tuition, required fees, and course materials, including books and supplies
- Student must be enrolled at least half-time in a degree or credential program
- Credit phases out at MAGI:
- $80,000–$90,000 (single)
- $160,000–$180,000 (married filing jointly)
2. Lifetime Learning Credit (LLC)
The LLC is a nonrefundable credit aimed at part-time students, graduate students, or those seeking to gain or improve job skills.
Key Features:
- Maximum credit: $2,000 per return (20% of the first $10,000 in expenses)
- Available for any number of years
- Covers tuition and required fees, but not books or supplies unless required
- No enrollment minimum—available even for one course
- Income phase-out:
- $80,000–$90,000 (single)
- $160,000–$180,000 (MFJ)
3. Qualified Education Expenses
It’s critical to distinguish between allowable and disallowable expenses:
|
Allowable |
Disallowable |
|
Tuition |
Room and board |
|
Required enrollment fees |
Insurance |
|
Required books/supplies (AOTC) |
Transportation |
|
Course materials (if required) |
Health fees, personal expenses |
Note: For AOTC, books and supplies can be claimed even if not paid directly to the institution, as long as they are required for coursework.
4. Institutional Reporting Requirements
To claim either credit, the taxpayer must have received a Form 1098-T from an eligible educational institution.
- Institutions must report payments received (Box 1) for qualified tuition and related expenses (QTRE)
- Box 1 may include amounts paid by third parties (e.g., grants, scholarships)
- Form 1098-T must also include the student’s TIN (Taxpayer Identification Number)
Encourage clients to verify the accuracy of their 1098-T forms early in the season to avoid delays or disallowed credits.
5. Filing the Credit on Form 8863
Both credits are claimed using IRS Form 8863, which is built into Drake Software’s tax prep system. Errors on this form are common and can lead to:
- IRS rejections or audits
- Delayed refunds
- Future year disqualification due to improper claims
Common Errors to Watch For:
- Missing or incorrect TINs
- Claiming AOTC for more than 4 years
- Incorrect expense classification
- Overstating Box 1 payments
Drake Software includes validation checks to help prevent these errors and supports electronic filing of Form 8863 with detailed audit trails.
6. Looking Ahead: The “One Big Beautiful Bill Act” and Education Policy Changes
While the AOTC and LLC remain the foundation of federal education tax benefits, proposed legislation like the One Big Beautiful Bill Act may introduce significant changes for tax professionals to monitor. This wide-reaching bill includes provisions that could expand employer-sponsored education benefits, enhance loan forgiveness tax exclusions, and simplify reporting requirements for both students and institutions.
Stay informed so you can adjust planning strategies if these reforms are enacted —particularly for clients with student debt or employer education benefits.
Help your clients get ahead.
Read out next blog post about The One Big Beautiful Bill Act.
Proactively support your clients with a pre-season checklist (URL to checklist) designed to prevent delays and reduce filing pressure.