IRS Form 8863 Instructions: Qualified Expenses, AOTC, and LLC

The instructions for IRS Form 8863 tell you to work the form out of order: complete a Part III on page 2 for each student first, because the yes/no questions there decide whether the student qualifies for the American Opportunity Tax Credit (worth up to $2,500 per student, 40% refundable) or the Lifetime Learning Credit (worth up to $2,000 per return, nonrefundable). Only then do you fill in Part I for the refundable AOTC and Part II for the nonrefundable credits.¹

Before You Start

You need a Form 1098-T from each student’s school. It carries the tuition figures you’ll enter and the school’s Employer Identification Number, which Part III asks for.² The school must be an eligible postsecondary institution, which broadly means one that participates in a federal student aid program.

Everyone on the return — you, your spouse if filing jointly, and any claimed dependents — must have a valid Social Security number, ITIN, or adoption taxpayer identification number issued by the return’s due date, including extensions.³

Check your modified adjusted gross income against the phase-out range. Both credits shrink between $80,000 and $90,000 of MAGI for single, head of household, and qualifying surviving spouse filers, and between $160,000 and $180,000 for married filing jointly. Above the top of the range, you get nothing.⁴

One filing status boundary is worth flagging before you fill anything in: if your filing status is married filing separately, you cannot claim either education credit. There is no workaround on the form.³

Which Credit Applies to Which Student

You can’t claim both credits for the same student in the same year, but you can claim the AOTC for one student and the LLC for a different student on the same return.³

The AOTC is the more valuable credit when the student qualifies. To get it, the student must be pursuing a degree or recognized credential, enrolled at least half-time for at least one academic period beginning during the tax year, still within their first four years of postsecondary education, have had the AOTC (or the old Hope Credit) claimed for fewer than four prior tax years, and have no federal or state felony conviction for possessing or distributing a controlled substance as of year end.⁵

The LLC has none of those restrictions. No degree requirement, no half-time minimum, no cap on years claimed. A single course to improve job skills qualifies, and so does full-time graduate study.⁶

Figure Qualified Expenses First

Both credits count tuition and required enrollment fees. The funding source doesn’t matter for the expense itself: money borrowed, gifted, or paid from savings still counts.⁷

Books and supplies are treated differently by each credit. For the AOTC, books, supplies, and equipment needed for courses count even if you bought them from an off-campus bookstore or online retailer.⁸ For the LLC, those same items only count if the school required you to pay for them directly as a condition of enrollment.⁷

Neither credit covers room and board, transportation, insurance, medical expenses, or fees for sports and hobby courses unless the course is part of a degree program.²

Now the step that catches the most people: subtract tax-free educational assistance before you enter anything on Form 8863. That means the tax-free portion of scholarships and fellowships, Pell Grants and other need-based grants, employer-provided educational assistance, and veterans’ educational benefits. You also cannot use the same dollars of expense for both an education credit and the tax-free portion of a 529 plan or Coverdell ESA distribution. You can use both benefits in the same year, but each dollar of tuition can only be claimed once. If you have $15,000 in tuition, you could apply $10,000 to a 529 distribution and claim a credit on the remaining $5,000.⁷

Part III: One Page Per Student

Complete a separate Part III on page 2 for each student you’re claiming a credit for. Enter the student’s name and Social Security number, the school’s name and address, and the school’s Employer Identification Number from the 1098-T.¹

The form then asks a series of yes/no questions: whether the AOTC has been claimed for this student in four or more prior years, whether the student was enrolled at least half-time, whether they had completed the first four years of postsecondary education before the tax year, and whether they have a felony drug conviction. Your answers route the student to the AOTC section, the LLC section, or neither.¹

Enter the student’s adjusted qualified expenses (what you paid, minus tax-free assistance) in the appropriate line at the bottom of Part III. That figure flows back to page 1.

Part I: The Refundable AOTC

Part I handles the refundable portion of the AOTC. For each qualifying student, the tentative credit equals 100% of the first $2,000 of adjusted qualified expenses plus 25% of the next $2,000, for a maximum of $2,500 per student. You need $4,000 in adjusted expenses to hit that ceiling.⁸

Line 7 gives you the tentative AOTC across all eligible students. You then apply the MAGI phase-out and multiply the result by 40% to get the refundable portion, which caps at $1,000 per student. This amount transfers to Form 1040, line 29, and can come back as a refund even if you owe no tax.⁹

Certain young taxpayers claimed as dependents face additional restrictions on the refundable portion based on their age and earned income; the instructions walk through those checks.³

Part II: Nonrefundable AOTC and LLC

Part II combines two amounts: the remaining 60% of your AOTC and the full Lifetime Learning Credit.

For the LLC, add up qualified expenses across all LLC students (up to $10,000 combined) and multiply by 20%. The maximum LLC is $2,000 per return no matter how many students you’re claiming for.⁴

Add the nonrefundable AOTC and the LLC, then run the Credit Limit Worksheet in the instructions. That worksheet caps the total at your actual tax liability minus certain other credits, because the nonrefundable portion can only reduce tax to zero. The final figure goes to Schedule 3 (Form 1040), line 3.¹

If the IRS Denies the Credit Later

An erroneous claim carries consequences beyond repaying the credit. If the IRS reduces or denies your AOTC for any reason other than a math error, you must file Form 8862 with your next return before you can claim the credit again.¹⁰

Penalties escalate with intent. A denial for reckless or intentional disregard of the rules bans you from claiming the credit for two years. A denial for fraud extends the ban to ten years. The IRS can also assess a penalty of 20% of the excessive credit amount if you claimed more than you were entitled to and lacked reasonable cause.¹¹

The mistakes that trigger these problems most often are failing to reduce expenses for scholarships and grants, claiming the AOTC for a fifth year, and claiming the credit for a student who doesn’t meet the enrollment requirements. Keep the Form 1098-T, scholarship award letters, and receipts for books and supplies with your tax records so you can substantiate the numbers on Form 8863 if the IRS asks.

1
Internal Revenue Service. Instructions for Form 8863
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Internal Revenue Service. Education Credits Questions and Answers
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Internal Revenue Service. Education Credits – AOTC and LLC
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Internal Revenue Service. Lifetime Learning Credit
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Office of the Law Revision Counsel. 26 USC 25A – American Opportunity and Lifetime Learning Credits
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Internal Revenue Service. About Form 8863, Education Credits
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Internal Revenue Service. Qualified Education Expenses
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Internal Revenue Service. American Opportunity Tax Credit
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Internal Revenue Service. Form 8863 – Education Credits
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Internal Revenue Service. About Form 8862, Information To Claim Certain Credits After Disallowance
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Internal Revenue Service. What To Do if We Deny Your Claim for a Credit