Short Answer
For tax years 2025 and 2026, the American Opportunity Tax Credit (AOTC) under IRC §25A(i) is worth up to $2,500 per eligible student, computed as 100% of the first $2,000 in qualified education expenses plus 25% of the next $2,000. Up to $1,000 per student (40%) is refundable on Form 8863 Line 8 - except for taxpayers subject to kiddie tax under §1(g) per §25A(i)(6). The Lifetime Learning Credit (LLC) under IRC §25A(c) is worth up to $2,000 per tax return (20% of the first $10,000 in qualified expenses, aggregated across all students). LLC is fully non-refundable. Both credits share the same MAGI phase-out: $80,000-$90,000 for single, HOH, and QSS filers; $160,000-$180,000 for MFJ. These thresholds are statutorily fixed and not adjusted for inflation. Married filing separately filers cannot claim either credit. OBBBA (P.L. 119-21) did not modify §25A.
How the Education Tax Credit Calculation Works
The §25A credit computation has five steps that apply identically in tax years 2025 and 2026. For full eligibility rules, qualified expense definitions, and scholarship coordination, see our AOTC vs Lifetime Learning Credit Guide.
Step 1: Reduce Qualified Expenses by Tax-Free Scholarships Confirmed
Under IRC §25A(g)(2)(C), qualified education expenses are reduced dollar-for-dollar by tax-free educational assistance: Pell Grants, tax-free scholarships under §117, employer educational assistance under §127 (up to $5,250), tax-free Coverdell ESA distributions under §530, and tax-free §529 plan distributions. Net qualified expenses = Gross qualified expenses minus tax-free assistance. The result floors at $0.
Formula: Net Expenses = max(0, Qualified Expenses − Tax-Free Scholarships and Grants).
Step 2: Compute Pre-Phase-Out Credit Confirmed
AOTC (per student): Credit = 100% × min($2,000, Net Expenses) + 25% × max(0, min(Net Expenses, $4,000) − $2,000). Maximum $2,500 per student.
LLC (per return, aggregated): Credit = 20% × min($10,000, Aggregate Net Expenses). Maximum $2,000 per return regardless of student count.
Step 3: Apply MAGI Phase-Out Confirmed
Phase-out applies across a $10,000 range (single/HOH/QSS: $80,000 to $90,000) or $20,000 range (MFJ: $160,000 to $180,000). Below the lower threshold: full credit. Above the upper threshold: $0 credit. Within the range: credit × (Upper Threshold − MAGI) ÷ (Phase-Out Range Width).
Formula: Phase-out fraction = max(0, min(1, (Upper − MAGI) ÷ Range Width)). Reduced Credit = Pre-Phase-Out Credit × Phase-out fraction.
Step 4: Split AOTC Into Refundable and Non-Refundable Portions Confirmed
AOTC only. Refundable portion = 40% × Reduced AOTC, capped at $1,000 per student. Non-refundable portion = 60% × Reduced AOTC (up to $1,500 per student). The LLC has no refundable portion - the entire reduced LLC is non-refundable.
Under IRC §25A(i)(6), the refundable 40% portion is disallowed entirely when the taxpayer is a child subject to kiddie tax under §1(g): under 18, OR 18 with earned income less than half of support, OR 19-23 full-time student with earned income less than half of support, AND with at least one living parent, AND not filing jointly. The non-refundable 60% portion still applies. In nearly every kiddie-tax case the parent should claim the credit on the parent's return instead.
Step 5: Form 8863 Routing Confirmed
Refundable AOTC carries from Form 8863 Line 8 to Form 1040 Line 29 (refundable credits). Non-refundable AOTC plus the full LLC carry from Form 8863 Line 19 to Schedule 3 Line 3 (non-refundable credits), then to Form 1040 Line 20. The school issues Form 1098-T showing tuition - but the 1098-T amount may not match qualified expenses (course materials are typically NOT shown on 1098-T), so the taxpayer must separately document books, supplies, and required equipment for AOTC.
MAGI Phase-Out Walkthrough
The MAGI phase-out for both credits is identical and runs across a $10,000 range (single/HOH/QSS) or $20,000 range (MFJ). The reduction is proportional within the range. The phase-out applies to the full computed credit - AOTC or LLC - before the refundable/non-refundable split.
MAGI Phase-Out Examples (AOTC Full $2,500, Single Filer)
| MAGI | Phase-Out Fraction | Reduced AOTC | Refundable Portion (40%) | Non-Refundable (60%) |
|---|
| $70,000 | 100% (below threshold) | $2,500 | $1,000 | $1,500 |
| $80,000 | 100% (at threshold) | $2,500 | $1,000 | $1,500 |
| $82,000 | 80% | $2,000 | $800 | $1,200 |
| $85,000 | 50% | $1,250 | $500 | $750 |
| $88,000 | 20% | $500 | $200 | $300 |
| $90,000+ | 0% (eliminated) | $0 | $0 | $0 |
For MFJ filers, the phase-out fraction uses the same arithmetic with $160,000 and $180,000 thresholds. The MFJ middle MAGI of $170,000 produces a 50% phase-out fraction. Note that the LLC phase-out works identically - a Single filer at $85,000 MAGI computing the LLC takes 50% × (20% × net qualified expenses).
Frequently Asked Questions
What is the American Opportunity Tax Credit for 2026?
The American Opportunity Tax Credit (AOTC) for tax year 2026 is worth up to $2,500 per eligible student. It is computed as 100% of the first $2,000 in qualified education expenses plus 25% of the next $2,000. Up to 40% of the credit (maximum $1,000 per student) is refundable. The AOTC is available only for the first four tax years of postsecondary education per student, requires at least half-time enrollment in a degree or recognized credential program, and is claimed on Form 8863. The MAGI phase-out is $80,000-$90,000 for single, head of household, and qualifying surviving spouse filers, and $160,000-$180,000 for married filing jointly. These phase-out thresholds are statutorily fixed and are not adjusted for inflation.
What is the Lifetime Learning Credit for 2026?
The Lifetime Learning Credit (LLC) for tax year 2026 is worth up to $2,000 per tax return. It is computed as 20% of the first $10,000 in qualified tuition and required enrollment fees, aggregated across all students on the return. The LLC is non-refundable, has no limit on the number of years it can be claimed, has no half-time enrollment requirement, and applies to any postsecondary course - including graduate school, professional school, and individual courses to acquire or improve job skills. The MAGI phase-out is $80,000-$90,000 single/HOH/QSS and $160,000-$180,000 MFJ, unified with the AOTC by Further Consolidated Appropriations Act 2020.
AOTC vs Lifetime Learning Credit: which one should I claim?
For most undergraduate students in their first four tax years of postsecondary study, the AOTC is the stronger choice. The maximum AOTC is $2,500 versus $2,000 for the LLC, the AOTC is 40% refundable while the LLC is fully non-refundable, and the AOTC includes off-campus textbooks as qualified expenses while the LLC limits course materials to those paid directly to the institution as a condition of enrollment. The LLC is the better fit for graduate students, students who have already used four years of AOTC eligibility, part-time students who do not meet the half-time AOTC enrollment threshold, and learners taking individual courses to acquire job skills. You cannot claim both credits for the same student in the same tax year under IRC §25A(c)(2)(A), but a taxpayer with multiple students can claim AOTC for one and LLC for another.
How does the MAGI phase-out for education credits work?
Both the AOTC and LLC use the same MAGI phase-out ranges: $80,000 to $90,000 for single, head of household, and qualifying surviving spouse filers; $160,000 to $180,000 for married filing jointly. The credit is reduced proportionally across the phase-out range. For a single filer with $85,000 MAGI, the phase-out fraction is ($90,000 - $85,000) divided by $10,000 = 50%, so the credit is reduced to 50% of the otherwise-allowed amount. Above $90,000 MAGI (single/HOH/QSS) or $180,000 (MFJ), the credit is fully eliminated. MAGI for §25A education credits equals AGI plus foreign earned income exclusion, foreign housing exclusion or deduction, and Puerto Rico and American Samoa income exclusions. These phase-out thresholds are statutorily fixed and are not adjusted for inflation.
Can married filing separately taxpayers claim education credits?
No. Under IRC §25A(g)(6), married filing separately taxpayers cannot claim either the American Opportunity Tax Credit or the Lifetime Learning Credit. This is a hard statutory bar that applies regardless of income, qualifying expenses, or student eligibility. Separated spouses who want to preserve education credit access need to either file MFJ or qualify for head of household status under §7703(b) by living apart for the last six months of the tax year while maintaining a household for a qualifying child. A spouse who unknowingly files MFS while claiming an education credit will have the credit disallowed on audit or matching review.
How do tax-free scholarships affect education credits?
Tax-free scholarships and grants reduce qualified education expenses dollar-for-dollar before the credit is computed. A student with $7,000 of qualified tuition and a $5,000 tax-free Pell Grant has only $2,000 of qualified expenses available for the AOTC or LLC computation. However, a student can elect to include all or part of a scholarship in gross income to free up qualified expenses for the credit. This Schmidt election is worth running when the AOTC saved exceeds the additional tax on the included scholarship. A common pattern: a dependent student includes scholarship income on their own return (taxed at low or zero rates), then the parent's AOTC increases on the family return by far more than the student's added tax.
Can a dependent student claim the AOTC on their own return?
No. Under IRC §25A(g)(3), if a student is claimed (or can be claimed) as a dependent on another taxpayer's return, the student cannot claim the credit on their own return. The credit goes on the return of the person who claims (or is entitled to claim) the dependent. Important nuance: even if the parent does NOT actually claim the student as a dependent, the student cannot claim the credit if the student COULD HAVE BEEN claimed. The choice belongs to the parent; the student does not get a fallback. Also, when a dependent student is the one who actually paid tuition, the IRS treats those payments as if made by the parent for credit purposes.
Why is my refundable AOTC zero on Form 8863 Line 8?
Under IRC §25A(i)(6), the refundable 40% portion of the AOTC is not allowed when the taxpayer is a child subject to the kiddie tax under §1(g). This generally applies to a taxpayer who is under age 18, OR is age 18 and earned income was less than one-half of the taxpayer's support, OR is a full-time student age 19-23 whose earned income was less than one-half of support, AND who has at least one living parent and does not file jointly. The non-refundable 60% portion (up to $1,500 per student) is still available against tax liability. In nearly every such case, the parent should claim the credit instead.
What expenses qualify for the AOTC versus the LLC?
AOTC qualified expenses include tuition, required enrollment fees, and course materials needed for the course of study - including books, supplies, and required equipment whether purchased from the school or from an outside vendor. A textbook bought from Amazon, a used bookstore, or a private seller qualifies for AOTC. LLC qualified expenses are narrower: tuition and required enrollment fees, plus books, supplies, and equipment ONLY if the institution requires them to be paid directly to the school as a condition of enrollment. Off-campus textbook purchases generally do NOT qualify for LLC. Neither credit includes room and board, transportation, health insurance, sports activity fees, or personal living expenses, even if charged on the Form 1098-T tuition statement.
Did OBBBA change the AOTC or Lifetime Learning Credit for 2026?
No. The One Big Beautiful Bill Act (P.L. 119-21, signed July 4, 2025) did not modify the §25A education credits. The AOTC remains a maximum $2,500 per student with 40% refundability up to $1,000. The LLC remains a maximum $2,000 per return at 20% of qualified expenses up to $10,000. The MAGI phase-out ranges remain $80,000-$90,000 single/HOH/QSS and $160,000-$180,000 MFJ - thresholds frozen by the Further Consolidated Appropriations Act 2020 §104 for tax years beginning after December 31, 2020 and not adjusted for inflation. Tax years 2025 and 2026 use identical statutory parameters.
What to Do Next
If You Have One Undergraduate Student in Years 1-4
Default to AOTC. Document tuition AND course materials (books, supplies, required equipment) separately - the Form 1098-T usually misses materials. Confirm dependency status with the parent intake. Use the full AOTC vs LLC Guide to verify the half-time enrollment and degree-program requirements.
If You Have a Graduate Student or Post-4-Year Undergraduate
Switch to LLC. Confirm the $2,000 per-return cap is binding (i.e. 20% of $10,000 in qualified expenses). If you have one student in AOTC years and one in LLC eligibility, claim AOTC for the first and LLC for the second on the same return - the credits do not interfere.
If You Have Scholarships Equal to or Exceeding Tuition
Run the Schmidt scholarship election analysis. Including all or part of the scholarship in the student's gross income may free up qualified expenses for the parent's AOTC by far more than the additional tax on the student. The Scholarship Tax Calculator models the trade-off.
If You Are MFS or Near the MAGI Phase-Out
MFS = zero education credit. Either file MFJ or qualify for HOH under §7703(b). If MAGI is between $80,000-$90,000 (single) or $160,000-$180,000 (MFJ), consider above-the-line deductions to recover the credit: traditional IRA contributions, HSA contributions, self-employed retirement deferrals all reduce MAGI dollar-for-dollar.