What Are Education Tax Credits?
Let’s explore this step-by-step guide for claiming education tax credits when you’re on a university payment plan. Education tax credits offset the cost of college by:
- Reducing your tax liability
- Covering qualified education expenses
- Providing refundable benefits
Indeed, it’s a missed opportunity for cost savings if you don’t claim education tax credits. If you’re a newbie, don’t be afraid to learn more about the process. You’ll find that it’s worth your time and effort.
There are two major credits available for students and their families.
Featured Programs
American Opportunity Tax Credit (AOTC)
The AOTC is for undergraduate students pursuing a certificate or degree. Each student can claim up to $2,500 per year. Up to 40% of the credit – or $1,000 maximum – is refundable. You can claim it even if you have no tax liability.
But it only covers the first four years of postsecondary education. Also, it only covers tuition, mandatory fees, and required course materials and books.
Lifetime Learning Credit (LLC)
The LLC has a broader coverage than the AOTC. You can claim it for any level of postsecondary education, including:
- Undergraduate certificate and degree courses
- Graduate certificate and degree courses
- Professional degree programs
- Non-degree courses (i.e., gain or upgrade job skills)
There’s no limit to the number of years you can claim the LLC.
You can claim up to $2,000 per return. Unlike the AOTC, the LLC isn’t a per-student credit.
Note that it’s a non-refundable credit. You’ll get a reduction in your tax liability, but you won’t get a refund.
But it usually only covers tuition and mandatory fees. Course materials, including books, can be covered under a specific condition. These must be directly purchased from the school as an enrollment condition.
Can You Claim Tax Credits If You’re on a Payment Plan?
Yes, you can claim education tax credits when you’re on a tuition payment plan. But when you make tuition payments affects your eligibility to claim.
You can only claim credits for tuition payments made during the tax year (January 1 to December 31). But there’s an exception to the rule. You can include tuition payments for academic terms that start within the first three months of the following tax year.
Let’s say that you’re on a university payment plan for your Fall 2025 enrollment. You agree that you’ll pay $1,000/month during the August-November 2025 period. Classes start in August 2025.
If you paid according to your plan, you can claim $4,000 in qualified education expenses on your 2025 tax return.
In another scenario, you’re on a university payment plan for your Spring 2025 enrollment. Classes start in January 2025. You agree to pay $1,000 for three months (December 2024 – February 2025).
You can only claim $1,000 on your 2024 tax return. But you can claim $2,000 on your 2025 tax return.
For this reason, you must make detailed records of your actual tuition payments made. Keep their receipts and account statements.
Yet another consideration is that you can only claim credits for qualified education expenses. Room and board, transportation, and living expenses are excluded.
Also, you can’t claim the AOTC and LLC for the same student in the same tax year. But if you have two eligible children in college, you can claim the LLC for one and the AOTC for the other in the same tax year.
If you claim both the AOLC and LLC for the same student in the same tax year, there are consequences. The IRS can disallow you from claiming credits for 2-10 years. You may also have to repay monies received in error and their interest and penalties.
So, being on a university payment plan won’t lead to your credit disqualification. But you must understand the link between a university payment plan and taxes first.
How to Qualify for the AOTC or LLC
But enjoying tuition payment plan tax credit benefits takes planning. Start by knowing their eligibility requirements, as outlined below.
For the AOTC, the student must be enrolled:
- At least half-time in a certificate or degree program and
- For at least one academic period (e.g., semester, quarter, or trimester) during the tax year
The student must also not have:
- Completed the first four years of postsecondary education before the start of the tax year
- Claimed the AOTC or the Hope Credit for four years
- A felony drug conviction at the end of the tax year
The income limits for the AOTC are as follows: (Dollar amounts refer to Modified Adjusted Gross Income)
| Filing Status | Full Credit | Partial Credit | No Credit |
| Single | $80,000 or less | $80,001 – $90,000 | Over $90,000 |
| Married Filing Jointly | $160,000 or less | $160,001 – $180,000 | Over $180,000 |
For the LLC, the student must be enrolled in at least:
- One academic period (e.g., semester, quarter, trimester, or summer session) during the tax year; and
- One course during the academic period
The student can be yourself, your spouse, or a dependent declared on your tax return.
Unlike with the AOTC, a felony drug conviction doesn’t disqualify a student from claiming the LLC.
The income limits for the LLC and AOTC are the same. For the LLC, its amount is gradually reduced if your MAGI is between $80,000 and $90,000 or $160,000 and $180,000 for married filing jointly. There’s no credit if your MAGI is $90,000 or more ($180,000 or more for married filing jointly).
The LLC income limits apply to the taxpayer claiming the credit, not the student.
Know how to qualify for education tax credits so you can plan for them.
Understanding the IRS Form 1098-T
The IRS Form 1098-T Tuition Statement is a crucial tax form if you want to claim education tax credits.
Colleges must provide Form 1098-T to students who paid qualified education expenses during the tax year. The law also requires them to provide the IRS with said form.
Students must receive their Form 1098-T by January 31 every year. You can receive it by mail, or it’s made available electronically through your college’s student portal.
If you’re on a tuition payment plan, you’ll also receive it. Your Form 1098-T will reflect your payments of qualified education expenses during the tax year. This is true even if said payments spanned two semesters (i.e., fall and spring).
Here’s what to look for on your Form 1098-T.
- Box 1. This shows the total payments received by the college for qualified education expenses during the tax year. Compare the total payments – date and amounts – with your personal records.
- Box 5. This shows the amount of scholarships and grants that the student received. These may decrease the amount of qualified education expenses eligible for education tax credits.
- Box 7. This is a box that, if you check it, means there are payments in Box 1 that are related to the academic period beginning in the first three months of the following year.
- Box 8. This indicates at least-half-time enrollment, a must when claiming AOTC. Your college determines what half-time enrollment is, so be sure to ask.
If there are discrepancies between your Form 1098-T and your receipts, contact the bursar’s office.
Step-by-Step: Claiming a Tax Credit While Using a Payment Plan
Follow these effective tax tips for college students to maximize your education tax credits:
Track what was paid during the tax year.
Again, you can only claim education tax credits for payments made during the tax year. You can’t claim billed amounts and unpaid balances on your payment plan.
So, it makes sense to keep close track of what you paid during the tax year.
- Review your university payment plan for its installment date, amount, and terms. Communicate with your college’s bursar’s office if there are issues.
- Keep your receipts of payment in an organized file. The receipts can be confirmation emails, bank and credit card statements, and receipts of purchase. Cancelled checks after these have cleared your account are also valid. Keep your financial aid disbursement documents, too.
Keeping your receipts has two main purposes. First, you can check them against your 1098-T form. Second, you can use them to verify payments in case of an IRS verification.
Tip: Always cross-check the payments on your Form 1098-T’s Box 1 and your own records. Your college can make mistakes and either overreport or underreport payments. Accuracy is key in claiming education tax credits.
Match those payments to the tax credit.
When you’re sure of the actual payments you’ve made, it’s time to match them to the tax credit. Keep in mind that not all actual payments qualify as qualified education expenses.
You must be careful in differentiating what’s qualified and what’s not under IRS rules. Otherwise, you may well be the subject of an IRS verification or be disqualified from claiming.
Here’s a more detailed look at what the IRS considers qualified education expenses.
- Tuition
- Mandatory fees
- Course materials, including books, supplies, and equipment
The AOTC covers course materials even if these are bought outside of the college. However, under the LLC, the course materials must be bought directly from the college.
The IRS doesn’t consider the following as qualified education expenses.
- Room and board
- Insurance
- Medical costs, including student health fees
- Transportation and travelling costs
- Living expenses
The exclusions remain true even when these are directly related to your college studies.
Report it properly on your tax return.
Then, it’s time to claim the education tax credits.
- Complete your IRS Form 8863 (“Education Credits”). Use the information from your Form 1098-T to complete it.
- Attach your Form 8863 to your IRS Form 1040 (i.e., the universal tax form for all individual taxpayers).
- File your Form 1040 only after you’ve reviewed it for completeness and accuracy.
You can either mail your tax return or e-file it. The e-filing route isn’t only faster, but it can also result in a faster refund.
Tip: Check that your parent isn’t claiming you as a dependent. If they are doing so, they must claim the credit on their tax return.
Common Mistakes to Avoid
Getting a college tuition tax break brings satisfaction because of the cost savings. But so many things can go wrong when claiming it. You’ll want to avoid these common mistakes that get in the way.
Misreporting amounts from IRS Form 1098-T
Again, accuracy is key to claiming and getting either the AOLC or the LLC. Always compare your Form 1098-T and personal records. If there are issues, resolve them first before filing your tax returns.
Assuming future payments count
No, they don’t, since only payments made in the current tax year count. You must then double-check your receipts and other proof.
Missing the tax year deadline
Timing matters in claiming education tax credits. So, don’t wait until January 2026 to make your December 2025 payment. If you’re paying by check, don’t wait until December 30 to mail it. If it isn’t processed by December 31, it will count as payment in January 2026.
Other Helpful Resources and Tools
You don’t have to be overwhelmed by the education tax credits process. There are many helpful resources and tools you can use to make it more understandable.
Start by going directly to the official sources. The IRS provides easy-to-understand guidelines about education tax credits.
Talk to your school’s bursar’s office and financial aid office. You’ll get guidance about enrolling in a university payment plan for starters. Then, you can ask for information about the 1098-T form and other tax-related matters.
Be sure to use online tax calculators, too. The IRS has an Interactive Tax Assistant (ITA) tool for this purpose. Consider tax software platforms (e.g., TurboTax), too.
In conclusion, claiming education tax credits pays off big time. But you must spend the time and effort to make it happen.