🎯 In 30 seconds: Two federal credits cut your tax bill for college costs. The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per student for four tax years, and up to $1,000 of it can come back as a refund even if you owe no tax. The Lifetime Learning Credit (LLC) is worth up to $2,000 per tax return, with no limit on years. You can’t count the same dollar of tuition for a credit and for a tax-free 529 withdrawal, so decide in advance which money pays which bill.
The two credits side by side
| Feature | AOTC | LLC |
|---|---|---|
| Maximum | $2,500 per student: all of the first $2,000 of expenses plus 25% of the next $2,000 | $2,000 per return: 20% of the first $10,000 for all students together |
| Refundable | 40%, up to $1,000 | No |
| How many years | 4 tax years per student, and only before the student has finished four years of college | Unlimited |
| Enrollment | At least half-time in a degree or credential program for at least one term | Any eligible course, even one class to build job skills |
| What expenses count | Tuition, required fees and course materials, even if bought elsewhere | Tuition and required fees; books only if they must be paid to the school |
| Income phase-out (MAGI) | $80,000–$90,000 single; $160,000–$180,000 married filing jointly | Same ranges |
| Other limits | No felony drug conviction | None of that kind |
The income ranges come from IRS Publication 970 for 2025. Check the 2026 edition when it is published. Neither credit covers room and board.
Who can claim, and the new 2026 rule
- Parent or student, not both. If parents claim the student as a dependent, only the parents can claim the credit for that student.
- No married-filing-separately returns. That filing status rules out both credits.
- New for 2026: the person claiming must have a Social Security number that is valid for work and was issued before the return’s due date. If the person claiming is not the student, the student needs a valid SSN too.
- One credit per student per year, but a family can claim the AOTC for one child and the LLC for another.
- Paperwork: the student normally needs a Form 1098-T from the school. You claim on Form 8863 and enter the school’s employer identification number.
Worked example: a credit and a 529 in the same year
The Nguyens file jointly with a modified AGI of $170,000. Their daughter Linh starts college in fall 2026. Her qualified expenses for the year are $14,000 of tuition and fees plus $1,000 of books, so $15,000. She also has a $5,000 tax-free scholarship that pays tuition, leaving $10,000 of qualified expenses. Housing and food cost $12,000, inside the school’s allowance.
| Step 1: set aside $4,000 of expenses for the AOTC | Tentative credit $2,500 |
| Step 2: apply the phase-out | ($180,000 − $170,000) ÷ $20,000 = 0.5, so the credit is $1,250 |
| Step 3: the 529 can pay the other $6,000 of tuition and books tax-free | $6,000 |
| Step 4: the 529 can also pay housing and food tax-free | $12,000 |
| Paid from income, savings or loans | $4,000 |
The common mistake is to pay the whole $10,000 of tuition from the 529 and still claim the credit on $4,000 of it. Those $4,000 are then counted twice, and part of the 529 earnings becomes taxable. The 10% additional tax does not apply to that part, but income tax does.
If the Nguyens’ income were $185,000, they would get no credit at all, and using the 529 for everything would be the simpler choice.
When reporting a scholarship as income can pay
IRS Publication 970 describes a move that surprises people. If a scholarship is allowed to be spent on housing or other non-tuition costs, the student can choose to report part of it as taxable income. That part is treated as paying for housing, which frees up tuition to count for the AOTC.
Example: Sam’s $12,000 scholarship covers his $10,000 tuition and may be used for any college cost. If all of it is tax-free, he has $0 of tuition left for a credit. If he reports $4,000 of the scholarship as income, $4,000 of tuition qualifies and the family can claim up to $2,500, subject to the income limits. The extra tax on $4,000 of a student’s income is often small. It only works if the scholarship’s terms allow non-tuition use, and it is worth running both versions in tax software or with a preparer.
A paperwork checklist
- Save the 1098-T (schools usually send it by early February) and check it against what you actually paid.
- Keep receipts for required books and supplies, which the 1098-T often misses.
- Keep the 1099-Q for any 529 withdrawal and a list of which bill each withdrawal paid.
- Count each expense once: scholarship first, then the credit, then the 529.
For the student loan interest deduction and employer tuition help, see the tax table on Paying for College. This page explains how the rules work; for your own return, a tax professional or IRS Publication 970 has the final word.
- How much of the AOTC can be refunded? Answer: 40%, up to $1,000.
- What new rule starts in 2026? Answer: The person claiming (and the student, if different) needs a work-valid SSN issued before the return’s due date.
- Can the same $4,000 of tuition support both the AOTC and a tax-free 529 withdrawal? Answer: No. Each dollar counts once.
- Which credit can an adult taking one night class use? Answer: The Lifetime Learning Credit.