Maximising Your 2026 Education Tax Benefits
The American Opportunity Tax Credit (AOTC) is a valuable federal tax benefit that can reduce your income tax by up to $2,500 for each eligible student. If the credit reduces your tax bill to zero, up to 40% of the credit can even be refunded, providing direct financial relief to students and families.
In addition to the AOTC, taxpayers should be aware of other education-related credits and deductions that may apply, such as the Lifetime Learning Credit, tuition and fees deduction, and employer-provided educational assistance. Coordinating these benefits carefully can maximise your total tax savings and ensure you claim every eligible dollar.
Who is an Eligible Student?
A student (you, your spouse, or a dependent listed on your return) is eligible if they meet four requirements:
- They are in their first four years of higher education (undergraduate) and have not completed those four years before the beginning of the tax year.
- They are enrolled in a program that leads to a degree, certificate, or other recognized credential.
- They are enrolled at least half-time for at least one academic period (e.g., semester, quarter) during the year.
- They have not been convicted of a federal or state felony drug offense.
You can only claim the AOTC for a maximum of four tax years per student.
How the Credit is Calculated
The AOTC is calculated based on the qualified education expenses you pay for each eligible student during the tax year. It allows 100% of the first $2,000 of qualified expenses, 25% of the next $2,000, with an overall maximum credit of $2,500 per student, per year.
Unlike many other credits, the AOTC is 40% refundable. This means that if you owe no tax, you can still get up to $1,000 as a refund for each student you claim.
If you have more than one child in college, you can claim the AOTC for each one as long as they all meet the eligibility rules.
What Counts as a Qualified Expense?
Qualified expenses are costs required for the student's enrollment or attendance. These include Tuition and required enrollment fees, Course materials (books, supplies, and equipment) needed for attendance, and Required student activity fees.
Expenses that do not count as qualified include Room and board (housing/meals), Insurance or medical expenses, and Transportation or personal living costs.
You must reduce your qualified expenses by the amount of any tax-free scholarships or grants the student received.
Claiming AOTC for Students at Foreign Universities
If you have a student attending an international university, you can still claim the American Opportunity Tax Credit (AOTC) even if the institution does not issue the standard IRS Form 1098-T. The IRS allows education credits for foreign schools as long as the institution is "eligible," meaning it participates in the U.S. federal student aid program.
Claiming Without a 1098-T
When a foreign university does not provide a 1098-T, you must substantiate your claim with alternative documentation to show the student was enrolled and that you paid qualified expenses. This documentation should include the university's EIN, proof of enrollment, detailed payment records, and any necessary currency conversion details.
How to Claim the Credit
Most students receive Form 1098-T from their school by January 31. This form reports tuition payments and any scholarships or grants. It serves as a helpful reference, but it does not automatically determine your credit. Some qualified expenses, such as required books or materials, may not appear on the form, so you should review your own records as well.
To claim the credit, you must complete Form 8863 and attach it to your Form 1040 or 1040-SR. This form calculates education credits by reporting qualified expenses and subtracting any tax-free educational assistance. The final credit amount is then applied to your tax return.
Claiming the Credit Retrospectively
If you realise you were eligible for the AOTC in prior years but did not claim it, you can generally recover those funds by filing a Form 1040-X to amend previous tax returns, such as for 2024 or 2025, and claim the missed credit. There is generally a three-year period to amend and receive a refund. Regardless of when you claim it, the AOTC is strictly limited to a total of four tax years per student.
Other Education Tax Benefits
In addition to the American Opportunity Tax Credit (AOTC), you may be able to use several other education tax benefits on the same return. While you generally cannot use the same student’s expenses for two different benefits, you can combine different reliefs strategically to maximise your overall tax savings.
One of the most common additional benefits is the Student Loan Interest Deduction. You can deduct up to $2,500 of interest paid on qualified student loans during the tax year. This deduction is available even if you also claim the AOTC for the same student, because it applies to interest paid to a lender rather than tuition or enrollment expenses.
Lifetime Learning Credit (LLC)
If one of your students does not qualify for the AOTC, for example if they are in graduate school or have already used four years of AOTC, you may be able to claim the Lifetime Learning Credit instead. The LLC is worth up to $2,000 per tax return, not per student, and is non-refundable.
You can claim the AOTC for one student and the LLC for another on the same return. However, you cannot claim both credits for the same student in the same year.
Tax-Free Savings Distributions (529 Plans)
If you have a 529 College Savings Plan or a Coverdell ESA, you can take tax-free distributions to pay for qualified education expenses. However, you cannot use the same $4,000 of expenses to justify both a tax-free 529 withdrawal and an AOTC claim.
Book an Education Tax Benefits Consultation
To ensure you are claiming every dollar you deserve for your students' education, booking a consultation can help you build a personalised tax strategy tailored to your family’s circumstances. Education credits, deductions, income limits, and coordination rules can quickly become complex, especially if you have multiple students or are combining benefits.
A focused review allows us to identify which credits apply, confirm your eligibility, and structure expenses in the most tax-efficient way possible. With the right planning, you can maximise your available credits and deductions while staying fully compliant with IRS requirements.