Deductions and Credits · Credits

Education credits

Section 25A holds two credits that look similar and behave differently. The American Opportunity credit is per student, partly refundable, limited to four years and to degree candidates, and reaches course materials. The Lifetime Learning credit is per return, never refundable, unlimited in years, open to a single job-skills course, and reaches almost nothing beyond tuition and required fees. Getting a question right usually means getting the expense definition right, and that definition is not the same for the two credits.

The rule

The American Opportunity credit. 100 percent of the first $2,000 of qualified tuition and related expenses for an eligible student and 25 percent of the next $2,000 — a maximum of $2,500 per student per year, never indexed^TY2026 (IRC § 25A(b)(1)(A), (B)). It is computed for each eligible student for whom an election under the section is in effect, so a household with three students in college can claim it three times.

Its four limits. four taxable years per student, counting elections made by the taxpayer or by anyone else, and only for a year in which the student carries at least half the normal full-time work load (IRC § 25A(b)(2)(A), (B), (3)(B))^TY2026 Two more limits apply only to this credit: the student must be enrolled in a programme leading to a degree or recognised credential, through the § 484(a)(1) Higher Education Act test in § 25A(b)(3)(A); and no credit is allowed for a student convicted of a federal or state felony offence of possessing or distributing a controlled substance before the end of the taxable year (IRC § 25A(b)(2)(D)). The four-year limit counts elections made by anyone, so a parent cannot reset the clock by having the student claim it.

Refundability. 40 percent of the American Opportunity credit as reduced by the IRC § 25A(d) phase-out, capped at $1,000 per student, and denied entirely to a taxpayer who is a child subject to the § 1(g) kiddie tax^TY2026 (IRC § 25A(i)). Two points are easy to miss. The 40 percent is taken after the income phase-out, so a partly phased-out credit yields a proportionately smaller refund. And the whole refundable rule is switched off for a taxpayer who is a child subject to the § 1(g) kiddie tax, which catches the student claiming in their own right far more often than it catches a parent.

The Lifetime Learning credit. 20 percent of up to $10,000 of qualified tuition and related expenses — a maximum of $2,000, per return rather than per student, and never indexed^TY2026 (IRC § 25A(c)(1)). It has no degree requirement, no work-load requirement, no year limit and no felony bar. Section 25A(c)(2)(B) expressly extends it to a course taken at an eligible educational institution to acquire or improve job skills. And § 25A(c)(2)(A) prevents double-counting: expenses of a student for whom the American Opportunity credit is allowed for the year are not taken into account for the Lifetime Learning credit at all.

What is a qualified expense — and where the two credits part company. Qualified tuition and related expenses means tuition and fees required for enrollment or attendance at an eligible educational institution (IRC § 25A(f)(1)(A)). Sports, games and hobbies are out unless part of a degree programme; student activity fees, athletic fees, insurance and anything unrelated to the academic course are out (IRC § 25A(f)(1)(B), (C)). Then § 25A(f)(1)(D) does one thing and only one: for the American Opportunity credit, it substitutes “tuition, fees, and course materials” for “tuition and fees”. Course materials are therefore in for that credit and out for the Lifetime Learning credit.

For the Lifetime Learning credit the regulation supplies the test that matters. Fees for books, supplies and equipment are qualified expenses “only if the fees must be paid to the eligible educational institution for the enrollment or attendance of the student” (Reg. § 1.25A-2(d)(2)(ii)). Buying a textbook at the campus bookstore is not that. Room and board, insurance, medical expenses including student health fees, and transportation are excluded whether or not the institution requires them (Reg. § 1.25A-2(d)(3)).

Reductions before anything else. Qualified expenses are reduced — before the credit formulas and before the phase-out — by any § 117 qualified scholarship, any veterans’ educational assistance allowance, and any other payment for the individual’s educational expenses excludable from gross income under federal law, other than a gift or bequest (IRC § 25A(g)(2)(A)–(C)).

The phase-out. Each credit is reduced ratably over modified adjusted gross income of $80,000 to $90,000, or $160,000 to $180,000 on a joint return, applied ratably to each credit — fixed amounts, because the § 25A(h) indexing rule was repealed by Pub. L. 116-260 § 104(a)(2)^TY2026 (IRC § 25A(d)(1), (2)). Modified adjusted gross income adds back the §§ 911, 931 and 933 exclusions.

The other special rules. No credit on a separate return by a married individual (IRC § 25A(g)(6)). A nonresident alien for any part of the year is out unless a § 6013(g) or (h) election is in effect (IRC § 25A(g)(7)). No credit unless the taxpayer receives the § 6050S(d) payee statement — the Form 1098-T (IRC § 25A(g)(8)). No credit for an expense that is deducted elsewhere in chapter 1 (IRC § 25A(g)(5)). And expenses paid in one taxable year for an academic period beginning in the first three months of the next are treated as paid for a period beginning in the year of payment (IRC § 25A(g)(4))^TY2026.

Who claims when a dependent pays. If someone else is entitled to claim the student as a dependent, the student may claim no credit, the student’s own payments are treated as paid by that other taxpayer, and the Form 1098-T received by the student is treated as received by that taxpayer (IRC § 25A(g)(3)). The rule does not turn on who actually wrote the cheque.

Identification. for taxable years beginning after 31 December 2025 the return must carry the taxpayer's social security number as defined in IRC § 24(h)(7), and the name and social security number of any student other than the taxpayer or spouse — a taxpayer identification number no longer suffices^TY2026 (IRC § 25A(g)(1)(A), (C)). The employer identification number of every institution paid must also appear, for the American Opportunity credit (IRC § 25A(g)(1)(B)).

Current figures

How it works in practice

Run the analysis student by student, then decide which credit each student’s expenses feed.

Sort the expenses first. Tuition and required fees count for both credits. Course materials count for the American Opportunity credit whoever sold them; for the Lifetime Learning credit they count only where the institution requires payment to itself as a condition of enrollment. Room, board, insurance, health fees and transport count for neither.

Reduce by tax-free assistance. Scholarships excludable under § 117 and veterans’ benefits come off the expenses before the credit is computed, not off the credit.

Test the student against the American Opportunity conditions — half-time work load, degree programme, no more than four prior election years, no disqualifying drug conviction. If the student passes, that credit is nearly always better: it reaches more expenses, it is worth more per student, and part of it is refundable.

Otherwise fall back to the Lifetime Learning credit, remembering that its cap is a single figure for the whole return however many students there are.

Then apply the shared phase-out, and only then take 40 percent of what is left of the American Opportunity credit as the refundable part.

How this has changed

The change for 2026 is an identification rule. Pub. L. 119-21 § 70606(a) amended § 25A(g)(1) generally, applying to taxable years beginning after 31 December 2025. The Code’s amendment note records what the paragraph used to require: the name and taxpayer identification number of the individual, plus the institution’s employer identification number for the American Opportunity credit. It now requires a social security number, with the term taking the meaning it has in § 24(h)(7) — a number issued by the Social Security Administration to a citizen or a work-authorised individual, before the return’s due date. A taxpayer or a student holding only an individual taxpayer identification number loses both credits from 2026. This mirrors the change made to the child tax credit by the same Act, and it is not mentioned in any source written before mid-2025.

The other change worth knowing is older but still catches people. Pub. L. 116-260 § 104(a)(1) replaced the two separate income limitations — the Lifetime Learning credit used to phase out at a much lower level than the American Opportunity credit — with the single shared range now in § 25A(d)(1), and § 104(a)(2) repealed § 25A(h), which had indexed the Lifetime Learning thresholds. Two things follow: the ranges are the same for both credits, and they do not move with inflation. That is why § 25A does not appear in the annual inflation revenue procedure at all, and why a reader who expects to find a 2026 figure there will not find one.

Exam focus

Expect the expense definition to be tested directly. Know that course materials belong to the American Opportunity credit and that books reach the Lifetime Learning credit only where the institution requires payment to itself. Know the four limits on the American Opportunity credit — four years, half time, degree programme, no felony drug conviction — and that none of them applies to the Lifetime Learning credit.

Expect one computation: a taxpayer with a liability below the credit, asked for the refund. Reduce the liability to zero, take 40 percent of the credit that was allowable before the tax limitation, and apply the per-student ceiling. Know that the Lifetime Learning credit is never refundable and that its cap is per return.

Know that the phase-out ranges are shared and fixed, that married filing separately forfeits both credits, and that a dependent student never claims in their own right.

Check yourself

1. A taxpayer with a gross tax liability of $400 is entitled to the full American Opportunity credit for one student. What refund does the credit produce?

Answer: $840. IRC § 25A(i) makes 40 percent of the credit refundable, and the nonrefundable part first reduces the liability. The credit is $2,500; $400 offsets the tax; 40 percent of the remaining $2,100 is $840, which is under the $1,000 per-student ceiling.

2. A student is in their fifth year of an undergraduate degree. Their parents claimed the American Opportunity credit for each of the first four years. What is available in year five?

Answer: The Lifetime Learning credit only. IRC § 25A(b)(2)(A) bars the election where such an election was in effect for the student — by the taxpayer or any other individual — for any four prior taxable years. The Lifetime Learning credit has no year limit.

3. Why does a $6,000 scholarship reduce a $7,600 tuition bill to $1,600 of qualified expenses rather than reducing the credit by $6,000?

Answer: Because IRC § 25A(g)(2) operates on the expenses “before the application of subsections (b), (c), and (d)”. The scholarship shrinks the base to which the credit formulas apply, and it does so before the income phase-out as well.

4. A married couple file separately. One spouse paid $9,000 of tuition for a job-skills course. What credit is available?

Answer: None. IRC § 25A(g)(6) provides that where the taxpayer is a married individual within § 7703, the section applies only if the taxpayer and spouse file a joint return. There is no living-apart exception here.

5. Three children of one household are each full-time first-year degree students with $4,000 of tuition. The parents’ income is below the phase-out. How much larger is the American Opportunity credit than the Lifetime Learning credit would be?

Answer: $5,500 larger. The American Opportunity credit is per student — $2,500 each, or $7,500 — while the Lifetime Learning credit is 20 percent of a maximum of $10,000 per return, or $2,000, however many students there are.