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 did not raise the LLC cap to $3,000 or expand these phaseout ranges. Use the $2,000 LLC cap and the $80,000–$90,000 / $160,000–$180,000 phaseouts for 2025.

Overview: Two Credits, Different Purposes

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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).

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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.

Year check: There is no OBBBA increase to a $3,000 LLC maximum. The 2025 maximum is $2,000 per return.

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.

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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

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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)

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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

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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

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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. Use the 2025 education-credit rules — exam answers must reflect the $80K/$160K phase-outs and the $2,000 LLC cap