Paying for college comes with real tax help, but the help arrives in separate pieces that interact. Two federal credits reduce your tax bill directly, a 529 plan lets savings come out tax free, and a deduction softens student loan interest later. Combine them the wrong way and you can give back money you thought you had saved.
This guide covers each piece for 2026 with worked dollar examples. The rules come from IRS Publication 970 (the 2025 edition, the latest published), the IRS education credits page, Rev. Proc. 2025-32, and the One Big Beautiful Bill Act (Public Law 119-21). For that law's wider effects, see our tax changes explained.
The Two Education Credits at a Glance
You can choose only one of the two credits for any given student in a given year.
The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per eligible student. You get 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000. Forty percent of the credit is refundable, which means up to $1,000 can come back to you as a refund even if you owe no income tax. It is available for only four tax years per student.
The Lifetime Learning Credit (LLC) is worth 20% of the first $10,000 of qualified expenses paid for all students on your return, so the most you can get is $2,000 per return. It is nonrefundable, and there is no limit on how many years you can claim it.
| Feature | AOTC | Lifetime Learning Credit |
|---|---|---|
| Maximum credit | $2,500 per student | $2,000 per return |
| Refundable? | 40% refundable (up to $1,000) | No |
| Years available | 4 tax years per student | Unlimited |
| Student must be | In a degree or credential program, at least half-time, and not past the first 4 years of college | Taking at least one course, including courses to gain or improve job skills. No degree needed |
| Books and supplies | Count even if bought elsewhere | Only if paid to the school as required |
| Income limit (MAGI) | Phases out from $80,000 to $90,000 ($160,000 to $180,000 joint) | Same |
| School's EIN on Form 8863 | Required | Not required |
Neither credit is available if you file as married filing separately or if someone else claims you as a dependent. The income figures are the ones in Publication 970 and on the IRS education credits page, and Rev. Proc. 2025-32 announces no separate change for 2026. Confirm them on Form 8863 when you file.
New for 2026: the person claiming the credit, and the student if a dependent, must have a Social Security number valid for work that was issued before the return's due date.
Worked Example: The AOTC
A married couple filing jointly earns $100,000 in wages. After the 2026 standard deduction of $32,200 (see our 2026 standard deduction guide), their taxable income is $67,800. Using the 2026 tax brackets, that produces $7,640 of federal income tax before credits. Their daughter is a freshman, and they paid $5,000 of qualified tuition and fees.
The credit is $2,000 plus 25% of the next $2,000 ($500), or $2,500. Their tax drops from $7,640 to $5,140. Of the $2,500, $1,000 is refundable and $1,500 is nonrefundable, so even a family owing no income tax would get the $1,000 back.
If their MAGI were $170,000 instead, the credit would shrink to $2,500 x ($180,000 minus $170,000) / $20,000 = $1,250. At $180,000 or more, it is gone.
Worked Example: The Lifetime Learning Credit
Maria is single, already has a bachelor's degree, and pays $6,000 for nursing prerequisite courses. The AOTC is out, but the LLC works: 20% x $6,000 = $1,200. If her MAGI is $85,000, halfway through the phase-out range, the credit drops to $600.
Who Can Claim a Dependent Student
Publication 970 settles who gets the credit:
- If you claim the student as a dependent, only you can claim the credit. The student cannot.
- If you do not claim the student, the student may claim it and you cannot.
- Expenses paid by the student, or by a third party such as a grandparent, are treated as paid by you if you claim the student.
- A student claimed as someone else's dependent cannot take a credit.
Claiming a student also affects the child tax credit, so look at the whole return first. Our guide to taxes when you have a child covers the dependent rules.
What Expenses Count
Both credits cover tuition and required enrollment fees, and the AOTC adds course materials the student needs. Neither counts room and board, insurance, medical expenses (including student health fees), or transportation, even if the school bills them.
Subtract tax-free scholarships and grants, including the tax-free part of Pell grants. Loans, gifts, and savings do not reduce your expenses, and expenses paid with a loan count in the year you pay them.
529 Plans: Tax-Free Savings for Education
A 529 plan, legally called a qualified tuition program, lets you contribute to an account for a named beneficiary. Contributions are not federally deductible, but earnings are not federally taxed when withdrawn for the beneficiary's qualified education expenses. There are no income limits for contributors, and you can change the beneficiary to another family member without tax consequences. State tax treatment varies, so check your own state's plan.
For college, qualified expenses include tuition and fees, books, supplies, and equipment required by the school. Computers, software, and internet access count if the beneficiary uses them while enrolled. Room and board counts for students enrolled at least half-time, up to the school's allowance or the actual charge for school housing. A 529 can also pay up to $10,000 of student loan principal or interest for the beneficiary or a sibling.
What Changed Under the OBBBA
Public Law 119-21, signed July 4, 2025, widened what a 529 can pay for.
- K-12 expenses. Beyond tuition, K-12 expenses now include curriculum, books and online materials, test and AP exam fees, dual enrollment fees, educational therapies for students with disabilities, and outside tutoring by an unrelated, qualified tutor. These apply to distributions after July 4, 2025.
- A higher K-12 cap. The annual limit on K-12 expenses doubles from $10,000 to $20,000 for taxable years beginning after December 31, 2025, so 2026 is the first year.
- Credentialing expenses. Costs of a recognized postsecondary credential program now qualify, including tuition, fees, books, equipment, and required testing and continuing education fees. Registered apprenticeships and state occupational licenses are examples, and the program must meet the law's definition.
If You Take Out Too Much
A withdrawal is tax free only up to the beneficiary's adjusted qualified education expenses. A student takes $10,000 from a 529, $2,000 of it earnings, but only $8,000 of qualified expenses remain after scholarships. The tax-free share of earnings is $2,000 x $8,000 / $10,000 = $1,600. The other $400 is taxable income, plus a 10% additional tax of $40. The 10% tax has exceptions, such as a tax-free scholarship.
Gift Tax Rules for Big Contributions
Contributions count as gifts. The 2026 annual gift tax exclusion is $19,000 per recipient, but for 529 plans you may elect to treat up to $95,000 (five years of exclusions) as given evenly over five years. A grandparent who contributes $95,000 for one grandchild in 2026 spreads it as $19,000 a year across 2026 through 2030. You report the election on Form 709.
529 to Roth IRA Rollovers
Under SECURE 2.0, unused 529 funds can move to a Roth IRA owned by the beneficiary if these conditions are met:
- The 529 account has been open for more than 15 years.
- The money moves by direct trustee-to-trustee transfer.
- Only contributions made more than five years before the rollover, plus the earnings on them, can be moved.
- Each year's rollover is capped at the IRA contribution limit, which is $7,500 for 2026, minus any other IRA contributions the beneficiary made that year.
- The lifetime cap is $35,000 per beneficiary.
The usual Roth IRA income limits do not apply to the rollover. If the beneficiary already put $3,000 into an IRA in 2026, only $4,500 can come over that year. At the 2026 limit, four years of rollovers reach only $30,000, so moving the full $35,000 takes at least five years.
The Student Loan Interest Deduction
After graduation, you can deduct up to $2,500 of interest paid on a qualified student loan. You can claim it without itemizing. For 2026, the deduction phases out between $85,000 and $100,000 of MAGI for single filers, and between $175,000 and $205,000 for joint filers.
Example: A single filer paid $2,500 of interest and has a MAGI of $92,500. The reduction is $2,500 x ($92,500 minus $85,000) / $15,000 = $1,250, so the deduction is $1,250. In the 22% bracket, that saves $275.
Three Mistakes to Avoid
1. Double Dipping
The same expenses cannot earn two benefits. You cannot claim both credits for one student, count expenses paid by a tax-free scholarship, or use expenses for a credit and also to justify a tax-free 529 withdrawal.
Here is the cost. A student has $10,000 of tuition and $4,000 of room and board, and the family claims the AOTC on $4,000 of tuition. If they withdraw $14,000 from the 529, including $3,000 of earnings, adjusted qualified expenses are only $10,000. Tax-free earnings are $3,000 x $10,000 / $14,000, about $2,143, leaving about $857 taxable plus roughly $86 of additional tax. The fix: pay the $4,000 of tuition from cash, claim the credit, and withdraw only $10,000 from the 529 for the rest. Room and board qualifies for the 529 but not the credit, so this split works well.
2. Using the Wrong Year
Credits are based on what you paid during the tax year, not what the school billed. A payment made in December 2026 for a term that begins in January through March 2027 counts for 2026, and only 2026. Match 529 withdrawals to expenses in the same calendar year too. Remember the AOTC allows only four tax years per student, no matter who claimed them.
3. Missing or Misreading Form 1098-T
The law generally requires the student to have received Form 1098-T from the school, with exceptions such as expenses paid entirely by scholarships. Box 1 shows payments received and is not reduced by the scholarships in box 5, so it may not match what you paid. Use your real amounts, keep receipts, and if the form is missing, ask the school for it and document the request. The AOTC also needs the school's EIN on Form 8863.
Frequently Asked Questions
Does a graduate student qualify for the AOTC?
No. The AOTC is only for the first four years of college, so graduate students usually use the Lifetime Learning Credit.
Do I have to itemize deductions?
No. The credits and the student loan interest deduction work with the standard deduction or itemizing.
What should I do next?
Add education costs to your year-end review with our 2026 tax planning checklist, see our dependent care FSA guide for a related benefit, and test a credit's effect with the Income Tax Calculator or the Tax Refund Calculator.
This article is general information, not tax or legal advice, so confirm your situation with a qualified tax professional or the IRS.