What Is IRS Publication 970: Education Credits, 529s, and Deductions

IRS Publication 970 is the federal government’s master guide to every tax break tied to education. It walks through two credits worth up to $2,500 per student, tax-advantaged savings accounts that grow free of federal tax, a deduction for student loan interest, an exclusion for employer-paid tuition, and the rules that decide when a scholarship is taxable. It also lays out the one rule that ties them all together: you cannot use the same dollar of education expense to claim more than one benefit.¹

The Two Education Tax Credits

Publication 970 covers two credits, and you can only use one of them per student in a given tax year.¹ Families with more than one student in school can claim different credits for different students on the same return.

American Opportunity Tax Credit

The AOTC is the more valuable of the two and is aimed at undergraduates in their first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, for a maximum of $2,500 per student per year. Up to 40% of the credit (capped at $1,000) is refundable, so you can get money back even if you owe no federal income tax.²

To qualify, the student must be pursuing a degree or recognized credential at an eligible school, enrolled at least half-time for at least one academic period in the tax year, and cannot have already completed four years of higher education before the year began. The credit is available for a maximum of four tax years per student, and any prior years the Hope Scholarship Credit was claimed for that student count toward that four-year limit.²

Qualified expenses include tuition, required enrollment fees, and books, supplies, and equipment needed for coursework. The AOTC is unusual in that these materials count even when purchased from a retailer other than the school.³ Room and board, insurance, medical expenses, and transportation never qualify.

Lifetime Learning Credit

The Lifetime Learning Credit fills every gap the AOTC leaves. It works for any year of postsecondary education, graduate school, and even individual courses taken to improve job skills. The credit equals 20% of up to $10,000 in qualified expenses, capped at $2,000 per return (not per student). It is entirely non-refundable, so it can reduce your tax to zero but not below.⁴

There is no half-time enrollment requirement, no degree requirement, and no cap on the number of years you can claim it. The trade-off is a narrower definition of qualified expenses: tuition and required fees always count, but books, supplies, and equipment only qualify when the school requires you to buy them from the institution as a condition of enrollment.³

Income Limits That Apply to Both Credits

Both credits use the same modified adjusted gross income phase-out: full credit up to $80,000 MAGI (single) or $160,000 (joint), phasing out completely at $90,000 and $180,000.² Married filing separately disqualifies you from either credit at any income level.⁵

Picking Between Them

For most undergraduates in the first four years of school, the AOTC wins. It is worth $500 more, covers a wider set of expenses, applies per student rather than per return, and gives back money even if you owe no tax. Use the LLC once the four-year AOTC window is used up, for graduate students, for part-time enrollees, or for professionals taking single courses.

Tax-Advantaged Savings Accounts

Publication 970 covers two savings vehicles that build education funds without federal tax on the growth: Section 529 plans and Coverdell Education Savings Accounts. Neither offers a federal deduction on contributions, but earnings grow tax-deferred and come out federally tax-free when spent on qualified expenses.

529 Plans

Section 529 plans are state-sponsored investment accounts. Many states offer a state income tax deduction or credit for contributions, though nothing at the federal level. Qualified expenses cover tuition, fees, books, supplies, equipment, and room and board for students enrolled at least half-time. Up to $10,000 per year can pay for K-12 tuition at public, private, or religious schools, and up to $10,000 over the beneficiary’s lifetime can go toward qualified student loan repayment (with a separate $10,000 lifetime cap for each of the beneficiary’s siblings).⁶⁷

The account owner keeps control of the funds and can change the beneficiary to another qualifying family member without triggering tax. There are no federal income limits on contributing, and state lifetime contribution caps typically run well over $300,000. Foreign schools qualify as long as they participate in the Department of Education’s federal student aid program.⁶

Rolling Unused 529 Money into a Roth IRA

Since 2024, the SECURE 2.0 Act allows leftover 529 funds to be rolled into a Roth IRA for the same beneficiary. The rules are strict:

The 529 must have been open for the current beneficiary for at least 15 years.
Contributions being rolled over must have been in the plan for at least five years.
The annual rollover cannot exceed the Roth IRA contribution limit for the year ($7,500 for 2026 for individuals under 50).
Total lifetime rollovers cannot exceed $35,000 per beneficiary.
The beneficiary must have earned income at least equal to the amount rolled over that year.

The 15-year clock means this is not a last-minute maneuver. Opening a 529 for a newborn gives plenty of runway; opening one for a high school student does not.

Coverdell Education Savings Accounts

A Coverdell ESA works like a smaller, more flexible cousin of the 529. Total contributions across all contributors cannot exceed $2,000 per year per beneficiary.⁸ The advantage is broader K-12 coverage: qualified expenses at the elementary and secondary level include tuition, books, tutoring, supplies, and technology, not just tuition.

Two limits narrow its usefulness. Contributions phase out between $95,000 and $110,000 of MAGI for single filers and between $190,000 and $220,000 for joint filers, and disappear above those ceilings. Funds must be used or rolled over to another eligible family member before the beneficiary turns 30, or the earnings become taxable and hit with a penalty.⁸

Penalties on Non-Qualified Withdrawals

Take money out of a 529 or Coverdell for anything other than qualified expenses and the earnings portion gets hit with regular income tax plus a 10% additional federal tax.⁷ Your original contributions come back tax-free because they went in with after-tax dollars. Exceptions to the 10% penalty include the beneficiary’s death or disability, a tax-free scholarship that reduces the need for the funds, and attendance at a U.S. military academy. Distributions are reported to you on Form 1099-Q.

Coordinating Credits and Savings Distributions

The core rule: the same expense cannot support both a tax-free 529 or Coverdell distribution and an education credit.¹ With a little planning you can use both benefits without any overlap.

The cleanest split: pay at least $4,000 of tuition and required fees from taxable funds to capture the full $2,500 AOTC, and use 529 distributions for room and board. Room and board qualify for a 529 but never for the AOTC, so nothing conflicts.

Scholarships and other tax-free educational assistance reduce your qualified expenses for the credits. But the IRS allows a useful workaround: you can choose to include a tax-free scholarship in the student’s income and then claim the education credit on those same expenses.¹ For a student with little other income, the scholarship may be taxed at 10% or 12% while the AOTC pays back up to $2,500. The math often favors the swap.

Student Loan Interest Deduction

If you are repaying qualified student loans, Publication 970 covers a deduction of up to $2,500 of interest paid during the year.³ It is an above-the-line deduction, so you get it whether or not you itemize, and it lowers your AGI, which can improve eligibility for other tax breaks.

The loan must have been taken out solely to pay qualified education expenses for you, your spouse, or a dependent. 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.⁹ Your lender reports interest paid on Form 1098-E.

Refinancing or consolidating student loans generally preserves the deduction as long as the new loan was used exclusively to refinance qualified education debt. Roll student loans into a non-education loan (a home equity line, for example) and the interest no longer counts.

Employer-Provided Educational Assistance

Your employer can pay up to $5,250 per year toward your education costs completely tax-free under Section 127.¹⁰ The coursework does not need to relate to your current job. The exclusion covers tuition, fees, books, and equipment, and the employer must have a written educational assistance plan.

Anything above $5,250 becomes taxable income unless it qualifies as a working condition fringe benefit, which generally requires the education to be directly related to your current job and to maintain or improve skills needed for that position.

Scholarships and Fellowships

Scholarships, fellowships, and tuition waivers are tax-free to the extent they pay for tuition, required fees, and books, supplies, and equipment required for your courses.¹¹ The key word is “required.” Anything the award covers beyond those direct academic costs is taxable.

The most common taxable pieces are amounts used for room and board, travel, and living expenses. Money received as pay for teaching, research, or other services required as a condition of the award is also taxable, even when the work is related to the student’s degree.¹¹ Graduate students on funded assistantships often find that a chunk of their stipend is taxable with no withholding taken. Plan for the April bill.

Records to Keep

The IRS audits education credit claims more often than many taxpayers expect. A CP75 or CP75A notice asks for documentation, which means Form 1098-T from the school plus receipts or canceled checks for any expenses beyond what the 1098-T reports, especially books and supplies bought elsewhere.¹² Form 886-H-AOC lists every document the IRS may want to see for an AOTC claim.

Keep tuition receipts, 1098-T forms, book purchase records, and proof of enrollment for at least three years after filing, which matches the general statute of limitations for audits. Underreport income by more than 25% and the window stretches to six years.¹³ Legible digital copies are fine.

1
Internal Revenue Service. No Double Education Benefits Allowed
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Internal Revenue Service. American Opportunity Tax Credit
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Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education
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Internal Revenue Service. Lifetime Learning Credit
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Internal Revenue Service. Education Credits: American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC)
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Internal Revenue Service. 529 Plans: Questions and Answers
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Internal Revenue Service. Topic No. 313, Qualified Tuition Programs (QTPs)
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Internal Revenue Service. Topic No. 310, Coverdell Education Savings Accounts
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
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Office of the Law Revision Counsel. 26 USC 127 – Educational Assistance Programs
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Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants
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Internal Revenue Service. Topic No. 654, Understanding Your CP75 or CP75A Notice
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Internal Revenue Service. How Long Should I Keep Records