If you or your dependent is paying for higher education, the IRS offers two tax credits that can directly reduce what you owe — not just your taxable income, but your actual tax bill. The key is knowing which credit you qualify for.
American Opportunity Tax Credit (AOTC)
The AOTC is the more generous of the two credits. It covers the first four years of post-secondary education.
What it's worth:
- Up to $2,500 per student per year
- 100% of the first $2,000 in qualified expenses
- 25% of the next $2,000 in qualified expenses
- 40% is refundable — meaning up to $1,000 comes back even if you owe no tax
Qualified expenses include:
- Tuition and fees required for enrollment
- Course materials (books, supplies, equipment) required as a condition of enrollment
Requirements:
- The student must be pursuing a degree or recognized credential
- Enrolled at least half-time for at least one academic period
- Must be in the first four years of higher education
- Cannot have a felony drug conviction
Income phase-out (2024):
- Single: $80,000–$90,000
- Married Filing Jointly: $160,000–$180,000
Lifetime Learning Credit (LLC)
The LLC has fewer restrictions but is less valuable.
What it's worth:
- Up to $2,000 per tax return (not per student)
- 20% of up to $10,000 in qualified expenses
- Not refundable — can only reduce your tax to zero
Qualified expenses: Tuition and fees required for enrollment (course materials are generally not included unless paid directly to the school).
Advantages over AOTC:
- Available for any year of post-secondary education (not limited to four years)
- Available for graduate school
- Available for professional development and individual courses
- No half-time enrollment requirement
Income phase-out (2024):
- Single: $80,000–$90,000
- Married Filing Jointly: $160,000–$180,000
You Can't Claim Both
You cannot claim both the AOTC and the LLC for the same student in the same year. If you have multiple students, you can use different credits for different students — for example, AOTC for one child and LLC for another.
The 1098-T Form
Your school will send a Form 1098-T showing tuition amounts billed and scholarships or grants received. This is the document you'll use to calculate your credit. Box 1 shows amounts paid; Box 5 shows scholarships — which reduce your qualifying expenses.
What Reduces Your Qualifying Expenses
You cannot count expenses paid with:
- Tax-free scholarships or grants
- Employer-provided educational assistance
- 529 plan distributions
- Veterans' education benefits
Only out-of-pocket amounts count toward the credit.
Student Loan Interest Deduction (Separate Benefit)
Even if you don't qualify for the credits due to income, you may be able to deduct up to $2,500 in student loan interest paid during the year. This is an above-the-line deduction — meaning it reduces your adjusted gross income even if you take the standard deduction.
The Bottom Line
If you're paying for a dependent's first four years of college, the AOTC is typically the better credit — it's larger and partially refundable. For graduate school, continuing education, or anyone past their fourth year, the Lifetime Learning Credit applies. Either way, hold onto your 1098-T and document your payments before filing.