IRS Publication 970 is the federal government’s plain-language guide to every tax benefit tied to education. It walks through two education credits worth up to $2,500 and $2,000, an above-the-line deduction for student loan interest, a small deduction for K–12 teachers who buy their own classroom supplies, the rules for 529 plans and Coverdell accounts, when scholarships are taxable, and how employer tuition assistance works. It also explains the coordination rules that stop you from claiming the same dollar of tuition under two different benefits, which is where most filing mistakes happen.
The Two Education Credits
Publication 970 covers two credits, and you have to pick the right one for each student. You cannot claim both for the same student in the same year, though a family with two students in school can claim one credit for each.1Internal Revenue Service. Education Credits – AOTC and LLC
American Opportunity Tax Credit
The AOTC is the more valuable of the two and is aimed at undergraduates. It is worth up to $2,500 per eligible student per year: 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000.2Internal Revenue Service. American Opportunity Tax Credit Forty percent of the credit, up to $1,000, is refundable, so you can get money back even if you owe no tax.
The eligibility rules are strict. The student must be pursuing a degree or recognized credential, enrolled at least half-time for at least one academic period during the year, and in their first four years of postsecondary education. You can claim the AOTC for a maximum of four tax years per student. A federal or state felony drug conviction before the end of the tax year disqualifies the student entirely.3GovInfo. 26 USC 25A – American Opportunity and Lifetime Learning Credits
The credit phases out between $80,000 and $90,000 of modified adjusted gross income for single filers, and between $160,000 and $180,000 for joint filers.2Internal Revenue Service. American Opportunity Tax Credit Married filing separately is ineligible. Qualified expenses are tuition, mandatory enrollment fees, and course-related books, supplies, and equipment. Books and supplies count even when you buy them from an outside retailer. Room and board never qualify.
Lifetime Learning Credit
The LLC is broader in who it covers and smaller in what it pays. There is no degree requirement, no minimum enrollment, and no cap on how many years you can claim it, which makes it the usual choice for graduate students, part-time students, and anyone taking a class for job skills. The credit is 20% of the first $10,000 in qualified expenses, up to $2,000 per return (not per student), and it is nonrefundable.4Internal Revenue Service. Lifetime Learning Credit
The income phase-outs match the AOTC, and married-filing-separately taxpayers are again shut out.4Internal Revenue Service. Lifetime Learning Credit The definition of qualified expenses is narrower: tuition and required fees always count, but books and supplies only qualify if the school requires you to pay for them directly as a condition of enrollment. A textbook you buy on your own works for the AOTC but not the LLC.
Student Loan Interest Deduction
You can deduct up to $2,500 of interest paid on qualified student loans during the year. It is an above-the-line deduction, so you get it whether or not you itemize.5Internal Revenue Service. Topic No. 456, Student Loan Interest Deduction The loan must have been taken out solely to pay qualified education expenses for you, your spouse, or a dependent, and both required and voluntary prepaid interest count toward the $2,500 cap.
Recent phase-out ranges have run from $80,000 to $95,000 of MAGI for single filers and $165,000 to $195,000 for joint filers, but the IRS adjusts these thresholds annually. Check the current year’s figures in Publication 970 or Topic 456 before filing.5Internal Revenue Service. Topic No. 456, Student Loan Interest Deduction Anyone claimed as a dependent on another return, and anyone filing married filing separately, is disqualified.
Educator Expense Deduction
K–12 teachers, instructors, counselors, principals, and aides can deduct up to $300 of unreimbursed classroom expenses. Two eligible educators filing jointly get up to $600 combined.6Internal Revenue Service. Topic No. 458, Educator Expense Deduction It is above-the-line, so no itemizing required. You must work at least 900 hours during the school year at an elementary or secondary school. Books, classroom supplies, computer equipment and software, and other classroom materials qualify. Homeschool educators and college professors do not.
529 Plans and Coverdell ESAs
Both accounts are funded with after-tax dollars, grow tax-free, and produce tax-free withdrawals when the money goes to qualified education expenses. Many states offer their own deduction or credit for 529 contributions, but the federal treatment is on the back end.
529 Plans
There is no federal annual contribution limit on 529 plans, though states set total account caps that often reach $300,000 or more. The account owner, not the student, controls the money. For college, qualified expenses include tuition, fees, room and board, books, supplies, equipment, and computer technology.7Internal Revenue Service. 529 Plans: Questions and Answers
For K–12, 529 plans have historically covered only tuition, capped at $10,000 per year. Starting in 2026, new federal legislation (H.R. 1) doubles that annual limit to $20,000 per student and expands qualifying K–12 expenses to include books, instructional materials, tutoring, standardized test fees such as the SAT and ACT, dual enrollment fees, and educational therapies for students with disabilities.
You can also use 529 funds to repay qualified student loans, up to a $10,000 lifetime cap per borrower across all 529 accounts for that beneficiary. Each of the beneficiary’s siblings gets a separate $10,000 lifetime allowance.8Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
Coverdell ESAs
Coverdell contributions are capped at $2,000 per beneficiary per year from all sources combined. The right to contribute phases out between $95,000 and $110,000 of MAGI for most filers, and between $190,000 and $220,000 for joint filers. Coverdells have long allowed a broad range of K–12 expenses beyond tuition, including tutoring, technology, and books. Contributions must stop when the beneficiary turns 18, and the funds must be used or rolled to another family member’s account before the beneficiary turns 30, unless the beneficiary has special needs.9Internal Revenue Service. Topic No. 310, Coverdell Education Savings Accounts
Non-Qualified Withdrawals
Pull money from either account for something other than qualified education expenses and the earnings portion is hit with ordinary income tax plus a 10% additional tax.10Office of the Law Revision Counsel. 26 USC 530 – Coverdell Education Savings Accounts Your original contributions come back tax-free. The 10% penalty is waived in cases of death, disability, and certain scholarship situations.
Rolling Unused 529 Funds to a Roth IRA
Starting in 2024, the SECURE 2.0 Act lets you roll unused 529 balances into a Roth IRA in the beneficiary’s name. The 529 account must have been open at least 15 years, and the lifetime rollover cap is $35,000 per beneficiary. Each year’s rollover cannot exceed the annual Roth IRA contribution limit, which is $7,500 for 2026 for people under 50, so reaching $35,000 takes at least five years of transfers. Contributions made to the 529 in the preceding five years, and their earnings, are not eligible. The beneficiary needs earned income at least equal to the rollover amount, because it counts against their Roth contribution limit.
Scholarships, Grants, and Work-Study
Scholarships, fellowships, and grants are tax-free if you are a degree candidate at an eligible institution and the money goes to tuition, fees, books, supplies, or equipment required for your courses.11Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants Any amount used for room, board, travel, or other non-qualified expenses is taxable.
There is a strategic election worth knowing. You can voluntarily treat otherwise tax-free scholarship money as taxable income, which frees up qualified expenses to claim an education credit. If you have $8,000 in tuition and a $5,000 scholarship, your net qualified expenses for the AOTC would normally be $3,000. Include $2,000 of the scholarship in income and you free up $5,000 in expenses, which can be worth more through the credit than the tax on the added income. The math depends on your bracket, so run both.
Federal Work-Study is different. The wages are taxable like any other job, reported on a W-2. Work-Study earnings do get favorable treatment in the federal financial aid formula, so they don’t cut into future aid the way ordinary earnings can.
Employer Educational Assistance
Under Section 127, the first $5,250 of educational assistance your employer provides each year is excluded from your gross income.12Office of the Law Revision Counsel. 26 USC 127 – Educational Assistance Programs Tuition, fees, books, supplies, and equipment all count, at both the undergraduate and graduate level, and the courses do not need to relate to your current job. Anything above $5,250 in a year is taxed as wages.13Internal Revenue Service. Employer-Offered Educational Assistance Programs Can Help Pay for College
The CARES Act extended the exclusion to cover employer payments toward student loan principal and interest, and recent federal legislation has made that expansion permanent. After 2026, the $5,250 annual limit will be indexed for inflation. The 2026 figure stays at $5,250.
Coordinating Benefits and Filing the Right Forms
The rule that trips people up: you cannot use the same dollar of expense for two benefits. A $5,000 tax-free 529 withdrawal that covered tuition cannot also feed the AOTC or LLC. Expenses paid by tax-free scholarships or employer assistance have to be subtracted from your total qualified expenses before you calculate a credit.1Internal Revenue Service. Education Credits – AOTC and LLC
To claim the AOTC or LLC, file Form 8863 with your Form 1040.14Internal Revenue Service. Lifetime Learning Credit – Section: Claiming the Credit You will need Form 1098-T from the institution, and the school’s EIN from that form has to appear on your Form 8863. If you took 529 or Coverdell distributions during the year, the plan administrator issues Form 1099-Q, sent to whoever received the funds (the beneficiary if paid to them or the school, the account owner if paid to the owner).
Keep receipts, canceled checks, and statements. The 1098-T reports what the school billed, but your qualified expenses can include things not on that form, like textbooks purchased from an outside retailer for AOTC purposes. Your own records are what fill the gap in an audit.
How These Accounts Affect Financial Aid
Savings accounts affect FAFSA calculations, and that matters when you decide who owns what. A parent-owned 529 is a parental asset on the FAFSA, which reduces aid eligibility at a rate of roughly 5.64% at most, compared with up to 20% for student-owned assets. A grandparent-owned 529 is not reported as a FAFSA asset at all, and since the 2024–2025 FAFSA cycle, distributions from grandparent-owned 529s no longer count as student income either. Coverdell ESAs owned by a parent or dependent student are treated like parent-owned 529s. Where grandparents want to help, this can change whether they contribute directly to a parent’s account or keep their own.