8.6 Education Credits (AOC & LLC)

The tax code offers two education credits: the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC). Both are claimed on Form 8863. For 2025, the credit amounts and phase-out thresholds are the same as 2024 (the TCJA-era amounts). OBBBA enacted notable changes starting in 2026 — including raising the LLC cap to $3,000 and expanding both AOC and LLC phase-outs — but those changes do NOT apply to 2025 returns.

Overview: Two Credits, Different Purposes

---

American Opportunity Credit (AOC) — 2025

AOC was made permanent by the PATH Act of 2015.

Credit Calculation

AOC = 100% of first $2,000 + 25% of next $2,000 = $2,500 maximum per eligible student

Refundable Portion: 40% of the AOC (up to $1,000) is refundable. The remaining 60% is nonrefundable.

Example: Calculated AOC of $2,500, regular tax of only $1,200. Nonrefundable portion ($1,500) reduces tax to zero (with $300 wasted). The refundable portion ($1,000) is paid as a refund. Total benefit: $2,200.

AOC Eligibility — All Required

1. Student has not completed the first four years of postsecondary education at the beginning of the year
2. Enrolled at least half-time for at least one academic period during the year
3. Pursuing a degree, certificate, or recognized credential
4. AOC has not been claimed for this student for more than 4 prior tax years
5. No felony drug conviction as of year-end
6. Not claimed as a dependent on another return (unless the parent is claiming the credit)

Qualified Expenses for AOC

• Tuition and required fees
• Required course-related books, supplies, and equipment (may be purchased anywhere — not required to come from the school)

NOT qualified: room and board, insurance, medical, transportation, personal expenses, sports/hobbies (unless required).

---

Lifetime Learning Credit (LLC) — 2025

Credit Calculation

LLC = 20% × first $10,000 of qualified expenses = $2,000 maximum per tax return (not per student) for 2025.

Coming in 2026 — OBBBA expansion: The LLC maximum increases to $3,000 per return and the phase-out range widens. These changes do NOT apply to 2025 returns.

LLC Eligibility

1. Any level of education (undergraduate, graduate, professional)
2. Courses to acquire or improve job skills (even outside a degree program)
3. No enrollment minimum — even a single course qualifies
4. Unlimited years
5. Felony drug conviction does NOT disqualify
6. Per-return limit — only one LLC per return regardless of number of students

Qualified Expenses for LLC

• Tuition and required enrollment fees
• Books, supplies, and equipment ONLY if required to be purchased from the institution as a condition of enrollment

Key Difference: AOC allows books purchased anywhere; LLC requires books purchased directly from the school.

---

2025 MAGI Phase-Out Rules (Both Credits)

Phase-Out Formula: Credit × [(phase-out ceiling − MAGI) / phase-out range]

Example: Single filer with MAGI $85,000 and full $2,500 AOC:

• Ceiling: $90,000
• Range: $10,000
• Credit: $2,500 × ($90,000 − $85,000) / $10,000 = $2,500 × 0.50 = $1,250

---

Form 1098-T and Form 8863

Form 1098-T (Tuition Statement)

Issued by the institution by January 31:

• Box 1: Payments received for qualified tuition and related expenses
• Box 4: Adjustments for a prior year
• Box 5: Scholarships or grants
• Box 7: Box 1 includes amounts for an academic period beginning Jan–Mar of next year

The 1098-T amount is informational; the taxpayer must compute actual qualified expenses paid (net of scholarships/grants).

Form 8863 (Education Credits)

• Part I: Refundable AOC
• Part II: Nonrefundable education credits
• Part III: Student and institution information (one for each student)

---

Coordination with 529 Plans and Other Tax Benefits

No double-dipping: Tax-free 529 distributions, employer-provided §127 educational assistance (up to $5,250 — made permanent and expanded to include student loan principal/interest by OBBBA), tax-free scholarships, and Pell grants reduce qualified expenses available for the AOC/LLC.

Strategy: Pay at least $4,000 of tuition out-of-pocket (or with taxable scholarships) to maximize the AOC; use 529 funds for room/board and additional expenses.

Other Coordination Rules

• The old tuition-and-fees deduction expired after 2020 and was not revived by OBBBA
• Student loan interest deduction (up to $2,500) operates independently of the education credits
• Cannot claim AOC and LLC for the same student in the same year

---

Which Credit Should You Choose?

Choose AOC when:

• Student is in first 4 years of undergraduate study
• Enrolled at least half-time
• MAGI within $80K/$160K limits
• Refundable portion is valuable (low tax liability)

Choose LLC when:

• Student is in 5th+ year or graduate school
• Job-skills courses outside a degree program
• Less than half-time
• Student has a felony drug conviction
• Multiple students whose combined expenses fit better under the per-return $2,000 cap

---

EA Exam Tips (2025)

1. Know the numbers: AOC $2,500 (40% refundable up to $1,000); LLC $2,000 per return
2. Per-student vs. per-return — AOC per student, LLC per return
3. Same 2025 phase-outs for both credits: $80K–$90K / $160K–$180K
4. MFS = no credits under either AOC or LLC
5. AOC: first 4 years; LLC: unlimited
6. Enrollment: AOC half-time minimum; LLC none
7. Books: AOC anywhere; LLC must come from the institution
8. Felony drug rule applies only to AOC
9. Form 8863 for both credits
10. No double-dipping with 529, §127, scholarships
11. OBBBA 2026 changes do NOT apply to 2025 — exam answers must reflect the $80K/$160K phase-outs and the $2,000 LLC cap