Education tax benefits can offset tuition costs for you, your spouse or a dependent, but they work in different ways. Credits reduce your tax directly. 529 plans let savings grow without federal tax when used for qualifying costs. The student loan interest deduction lowers taxable income. The One Big Beautiful Bill Act adds new 529 rules and, beginning in 2026, a stricter Social Security number requirement for the two main credits.
American opportunity credit vs. lifetime learning credit
You cannot claim both credits for the same student in the same year. If you qualify for the AOTC it is usually the larger credit.
| Feature | American opportunity credit | Lifetime learning credit |
|---|---|---|
| Maximum credit | $2,500 per eligible student | $2,000 per return |
| How it is figured | 100% of first $2,000 of expenses plus 25% of the next $2,000 | 20% of up to $10,000 of expenses |
| Refundable? | 40% (up to $1,000) can be refunded | No |
| Years available | Four tax years per student | No limit |
| Enrollment | At least half-time, in a degree or credential program | One or more courses, including to build job skills |
| MAGI phase-out (2025) | $80,000 to $90,000 ($160,000 to $180,000 joint) | Same |
Married people filing separately cannot claim either credit. The IRS also says a student generally must receive Form 1098-T from the school, with narrow exceptions, and you claim the credit on Form 8863. Qualified expenses include tuition and required fees; for the AOTC, course materials count too. Room and board, insurance and transportation do not. Scholarships and grants that are tax-free reduce the expenses you can use.
529 plans
A 529 plan (also called a qualified tuition program) is a state or school program for education savings. Contributions are not deductible on your federal return, but earnings are not taxed when withdrawals are used for qualified education expenses. These include college tuition, fees, books, supplies, required equipment, room and board for students enrolled at least half-time, computers and related services, and certain apprenticeship and student loan payments (up to $10,000 of loan principal and interest for the beneficiary and again for each sibling).
K-12 and credentialing under the new law
For distributions after July 4, 2025, the list of qualified elementary and secondary expenses expanded from tuition to include curriculum, books, online materials, tutoring from qualified instructors, standardized test fees, dual enrollment fees and certain educational therapies. The limit on K-12 tuition paid from a 529 plan per beneficiary rises from $10,000 to $20,000 for taxable years beginning in 2026. 529 funds can also pay for recognized postsecondary credential programs such as certain trade, license and certification programs.
Taxes on non-qualified withdrawals and rollovers
If you withdraw more than the beneficiary's adjusted qualified education expenses, the earnings portion is taxable and generally carries a 10% additional tax, with exceptions such as death, disability, scholarships and the military academies. Unused funds can be moved to another family member's 529, to an ABLE account within limits, or in some cases to a Roth IRA for the beneficiary if the 529 account has been open for more than 15 years and the amount does not exceed contributions made at least five years earlier. Roth annual limits still apply. See our Roth conversion guide for the Roth rules.
You cannot use the same expenses for both a tax-free 529 withdrawal and an education credit. Plan the order of payments.
Student loan interest deduction
You can deduct up to $2,500 of interest paid on a qualified student loan, even if you do not itemize. For 2025, the deduction phases out between $85,000 and $100,000 of modified AGI ($170,000 to $200,000 joint). For 2026, the ranges are $85,000 to $100,000, and $175,000 to $205,000 for joint returns. Married people filing separately cannot take it.
Example
Example: Ming is a sophomore who is claimed as a dependent on his parents' joint return. His parents paid $6,000 of tuition in 2025 and have modified AGI of $140,000. They can claim the AOTC: 100% of the first $2,000 plus 25% of the next $2,000 is $2,500. Because they are below $160,000, there is no phase-out. Up to $1,000 of the credit can come back as a refund even if they owe no tax. The remaining $2,000 of tuition could be paid from a 529 plan without double counting.
Illinois
Illinois runs its own 529 programs, Bright Start and Bright Directions, and the Illinois Department of Revenue explains how contributions are handled on Schedule M. Illinois income tax starts from federal AGI. See our Illinois tax guide.
How we can help
We can compare the credits, make sure the Form 1098-T and the SSN requirements are lined up before filing, and help coordinate 529 withdrawals with credits. International students and families should also read about international students and OPT. Learn more about individual tax preparation or contact us.
Frequently asked questions
Can I claim the AOTC if my child pays their own tuition?
If you claim the student as a dependent, the expenses they pay are treated as yours. If the student is not claimed as a dependent, the student claims the credit on their own return, if otherwise eligible.
Is a 529 contribution deductible on my federal return?
No. The benefit is tax-free growth for qualified education expenses. Some states give a state deduction or credit.
Can I claim the credit if the school did not send a Form 1098-T?
In limited situations, yes. The IRS describes cases where a school is not required to issue one, and you must be able to show enrollment and payment.
Does the SSN rule apply to my 2025 return?
No. The new Social Security number requirement applies beginning in 2026. For 2025, the IRS requires a taxpayer identification number issued by the filing due date.
Official sources
- IRS: Publication 970 (2025), Tax Benefits for Education
- IRS: Education credits - AOTC and LLC
- IRS: Rev. Proc. 2025-32 (2026 inflation adjustments)
- Public Law 119-21 (One Big Beautiful Bill Act)
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.