Education Tax Credits: Which One Fits You, and the 1098-T to Watch For

Sometime around the end of January, a Form 1098-T will turn up in your student portal or your mailbox, with an official-looking number in box 1. That number is not the amount you can claim. It’s what the school received for tuition during the calendar year, before your grants, scholarships and employer help come off, and sometimes for a term that belongs to a different year. Copy it straight into tax software and you can overclaim and get a letter from the IRS later, or miss money because you never checked which of the two credits is yours.

Those two federal credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). A credit comes off your tax bill dollar for dollar, which makes it worth more than a deduction of the same size, and you can claim only one per student per year. As a rough guide, adults coming back to finish a first degree at half-time or more often fit the bigger AOTC; adults taking a course or two for work, or who already have a bachelor’s, usually land on the LLC. The easiest way to see how it works is to itemize one year.

One year of school, itemized

Of $15,730 spent, $5,500 is in the running for the AOTC and $5,200 for the LLC. Here’s why each line landed where it did.

What counts, and what doesn’t

Tuition and required fees

Count for both credits. This is the core of what box 1 of the 1098-T is trying to report.

Required books and supplies

For the AOTC, they count if the course requires them, even if bought elsewhere. For the LLC, only if paid to the school. That’s why Lucas’s $300 of online books counts once, not twice.

Student health fee

Doesn’t count. IRS Publication 970 excludes insurance, medical expenses (including student health fees), room and board, transportation and similar personal or living costs, even if the school requires you to pay them as a condition of enrolling.

Rent and the bus pass

Don’t count, for the same reason. They’re real costs of being a student, and they belong in your budget, just not on Form 8863.

How you paid matters less than people think. Tuition paid with student loans does count, because you’re repaying that money; so does tuition paid from savings or wages. If you can’t tell which lines of your aid package are loans, our line-by-line guide to aid offers shows how.

Then subtract every dollar of tax-free help

You can claim a credit only on money you actually paid. Before figuring it, subtract:

• Pell Grants and other tax-free scholarships and grants (our guide to the types of financial aid sorts grants from loans);
• tax-free employer tuition assistance (see employer tuition assistance);
• veterans’ education benefits; and
• expenses you already used for another tax benefit.

One twist from Publication 970: you can sometimes choose to treat part of a scholarship or Pell Grant as taxable income, as if it paid for rent, so more of your tuition is left to claim. It can help when grants push your adjusted expenses below $4,000, but you pay tax on the amount you include, so run it both ways in your tax software and keep the better result.

The math

For Lucas, line 1 is $5,200 + $300 = $5,500 for the AOTC. Line 2 is $5,500 − $1,500 = $4,000. Line 3 is $2,000 + (25% × $2,000 = $500) = $2,500, of which up to 40%, $1,000, is refundable. His income is below the phase-out, so line 4 doesn’t apply.

The LLC instead: the books weren’t paid to the school, so line 2 is $5,200 − $1,500 = $3,700, and 20% × $3,700 = $740. The AOTC is worth $1,760 more.

The shape is the lesson. The AOTC pays back every dollar of the first $2,000 and stops growing at $4,000. The LLC climbs slowly and needs $10,000 of expenses to reach its $2,000 cap. So the AOTC wins whenever you qualify for it.

Which credit is yours

These figures come from IRS Publication 970 for 2025 returns. The 2026 figures weren’t final when we last checked, so confirm them in the 2026 edition before filing. Neither credit is available if you’re married filing separately, or if someone else claims you as a dependent (they may be able to claim it instead).

To test for the AOTC, go in order; the first answer that rules you out sends you to the LLC.

1. Half-time for at least one term that starts in the tax year? Your school defines half-time; at many it’s 6 credits a semester. One course a term usually isn’t enough.
2. In a program leading to a degree or recognized credential? Classes “for yourself” don’t count for the AOTC.
3. Fewer than four earlier years of AOTC claimed for you, by anyone? If a parent claimed it for you as a freshman, those years count against your four.
4. Not yet finished four years of college as of January 1? If your school considers you to have four years of credit, you’ve aged out.
5. No felony drug conviction as of year-end?

The 1098-T, and what it leaves out

Your school sends Form 1098-T, Tuition Statement, by January 31, or the next business day if that’s a weekend. The 2025 forms were due February 2, 2026. January 31, 2027 is a Sunday, so expect 2026 forms by February 1, 2027. Many schools post it in the student portal instead of mailing it, so look there first.

Box 1 shows payments the school received during the year for qualified tuition and related expenses. Box 5 shows scholarships and grants the school handled, including Pell Grants. Lucas’s form would show his $5,200 and his $1,500, and nothing about his books.

That’s the general problem: the form counts what the school received, which may not match when you paid; it leaves out required books bought elsewhere; and it may not reflect employer payments made to you rather than the school. Your billing statements and receipts are the real record. If a school was required to send you a 1098-T and didn’t, you may still be able to claim a credit, but you’ll need to show you asked for it and can prove what you paid.

Claim it on Form 8863

Either credit goes on Form 8863, Education Credits, filed with your Form 1040; tax software asks the questions for you. Have these ready:

• Form 1098-T, with the school’s employer identification number printed on it.
• Billing statements or receipts for tuition, fees and required course materials.
• Records of grants, scholarships or employer payments for the same costs.
• For each term: your enrollment status (half-time or more?) and the program you were in.
• How many earlier years the AOTC was claimed for you.
• Social Security numbers for you and the student, if that’s someone else.

Still choosing a school? Count the credit as money that comes back months after the bill is due, not as a discount on it. The cost estimator shows the gap you’d need to cover up front.

So, looking at your own year: were you at least half-time for one term, in a program that ends in a degree or credential?