It’s that time of year — tax filing season — and if you (or your student) paid for college in 2025, you may be eligible for valuable education tax credits. Many tax software programs don’t provide clear instructions, so reviewing the Form 8863 instructions yourself can make a big difference when claiming credits like the American Opportunity Tax Credit (AOTC).

What is the American Opportunity Tax Credit (AOTC)?

The AOTC is the most valuable education credit available to most undergraduate students. For tax year 2025 (returns filed in 2026):

  • You can get up to $2,500 per eligible student.
  • That’s 100% of the first $2,000 and 25% of the next $2,000 of qualified expenses paid.
  • Up to 40% (up to $1,000) of the credit may be refundable — meaning you could get it even if you owe no tax.

To claim the AOTC, you must file Form 8863 with your Form 1040 and claim the student as a dependent on your tax return.

AOTC Eligibility Requirements (2025 Tax Year)

To claim the full AOTC:

  1. MAGI (Modified Adjusted Gross Income)
    • Full credit: MAGI ≤ $80,000 (single/HOH) or ≤ $160,000 (married filing jointly).
    • Partial credit: MAGI between $80,000–$90,000 (single) or $160,000–$180,000 (joint).
    • No AOTC allowed if MAGI exceeds $90,000/$180,000.
  2. Student must be pursuing a degree or recognized credential.
  3. Enrolled at least half-time in at least one academic period during the year.
  4. Not completed the first four years of higher education at start of 2025.
  5. AOTC hasn’t been claimed for that student more than four tax years previously.
  6. May not have a disqualifying felony drug conviction.

Common Software Pitfalls — What to Watch For

Tax programs often just ask for what’s on your Form 1098-T — but that can be misleading.

1) Box 7 (“Amounts billed for qualified tuition and related expenses”)

If box 7 is checked, it shows charges billed — not necessarily what was paid. AOTC applies only to amounts paid in the calendar year.

2) 1098-T Doesn’t Capture All Qualified Expenses

The 1098-T typically shows only tuition and eligible fees net of scholarships. But qualified education expenses (QHEEs) for the AOTC can include:

  • Tuition and fees
  • Books and required supplies
  • Course materials (even if bought outside the school)
  • Certain computer and internet costs if required for attendance or required by coursework (see IRS guidance on Pub. 970)

So don’t ignore costs you paid that aren’t on the 1098-T. They may count toward the credit if they meet the rules. And do watch out — qualified expenses for the AOTC are more limited than for 529 distributions; for example, room and board are not qualified expenses for the AOTC.

Adjusting for Scholarships, Grants, and 529 Plans

IRS rules require you to add up all qualified expenses this way:
Total qualified education expenses you paid minus:

  • Tax-free scholarships and grants (including Pell grants)
  • Tax-free employer educational assistance
  • Veterans’ educational assistance
  • Amounts paid with 529 or Coverdell ESA tax-free distributions
    = Adjusted Qualified Education Expenses that count for the AOTC.

Smart Workarounds When Scholarships or 529s Complicate Things

If scholarships or 529 plan payments push your adjusted expenses below the $4,000 threshold for a full credit you have a few options:

1) Student claims scholarship income

You may choose to have the student include up to $4,000 of scholarships on their own return so that amount doesn’t reduce QHEEs for AOTC. This can let you claim the full credit. (This may make sense if the student owes little or no tax.)

2) Reclassify some 529 distributions as nonqualified

You can designate up to $4,000 of 529 distributions as nonqualified so those dollars count in your calculation. You will pay income tax + a 10% penalty on the earnings portion of that nonqualified amount. But that might be less than the tax savings from claiming the full AOTC. (If the student claims the distribution, the tax cost is usually lower than if the parent does.)

Important: Nonqualified distributions do not count as qualified education expenses, but designating part as nonqualified can help net out the right amount that does count for credit purposes.

AOTC Calculation Tip: the First $2,000 is Worth the Most

Because AOTC gives a 100% credit on the first $2,000 and only 25% on the next $2,000, it often makes sense to think in terms of “net benefit per dollar”:

  • First $2,000 of qualified expenses → up to $2,000 credit
  • Next $2,000 → up to $500 credit
  • So claiming a bit more scholarship income or nonqualified distribution might or might not yield a larger overall tax benefit.

Example: Claiming an extra $2,000 of scholarship income might cost a student tax at 10%, but it can unlock $500 more AOTC for the family.

Final Notes & Software Quirks

  • Software may incorrectly apply only the 1098-T amounts or mishandle 529 distributions. Carefully review entries on Form 8863 before filing.
  • If software shows your 529 distributions as taxable but doesn’t give you the credit you expected, manually check the adjusted qualified expenses calculation.
  • Remember that AOTC can only be claimed four times per student — not per calendar year, and not per program.

Bottom Line for 2026 Tax Filers

✔ Don’t rely solely on what tax software tells you — pull up Form 8863 instructions and read them.
✔ Your goal is to maximize adjusted qualified education expenses that qualify for the AOTC.
✔ Understand how scholarships, 529s, and books/supplies fit into that calculation.
✔ In many cases a little manual math will yield far more credit than blindly following default software prompts.

And as always, check with your tax advisor if you have questions about claiming the AOTC. This is not tax advice.