If you’re covering education expenses, you might be eligible for valuable tax credits that can ease the financial burden. One of the key forms involved in this process is Form 8863, which plays a role in claiming education-related benefits on your tax return. While we focus on helping clients navigate how education credits impact their overall tax strategy through our tailored tax services, it’s helpful to understand how this form fits into the bigger picture.
Understanding how this form works, who qualifies, and how to file it correctly can make a real difference come tax time. Here’s everything you need to know.
What Is Form 8863?
Form 8863 is used to claim education-related tax credits that help reduce the cost of higher education. Specifically, it covers two types of credits offered by the IRS:
- The American Opportunity Credit, which is partially refundable, meaning you could receive a refund even if the credit exceeds the amount of taxes you owe.
- The Lifetime Learning Credit, which is nonrefundable and can only reduce your tax liability—any amount beyond what you owe won’t be paid out as a refund.
Understanding the difference between these two credits is essential when using Form 8863, as each one offers a unique benefit depending on your tax situation.
Who Can Claim an Education Credit?
You can claim an education credit if you, your spouse, or your dependent is enrolled in an eligible educational institution. However, there are specific conditions:
- You must have paid qualified education expenses.
- The student must be pursuing a degree or recognized credential.
- The credit is only available for students enrolled at least half-time (for the American Opportunity Credit).
- To claim the American Opportunity Credit (AOC), your Modified Adjusted Gross Income (MAGI) for 2024 must be below $90,000 if filing individually, or $180,000 if married filing jointly.
- The Lifetime Learning Credit (LLC) is only available to taxpayers with a 2024 MAGI below $90,000 if filing individually, or $180,000 if married filing jointly.
Both credits cannot be claimed for the same student in the same year, so it’s important to understand the distinctions.
Education Credits from Form 8863: A Breakdown
American Opportunity Credit
This credit allows up to $2,500 per eligible student:
- 100% of the first $2,000 of qualified expenses
- 25% of the next $2,000
- 40% of the credit is refundable
It applies to the first four years of higher education and is often more beneficial for undergraduate students.
Lifetime Learning Credit
This offers a maximum of $2,000 per tax return:
- 20% of the first $10,000 in qualified expenses
- No limit on the number of years it can be claimed
This credit is more flexible and applies to undergraduate, graduate, and professional degree courses.
Form 8863 Instructions: How to Fill Out Form 8863
Form 8863 has three parts, but you must complete Part III for each student before moving to Parts I and II.
Part I – Refundable American Opportunity Credit
Once you’ve filled out Part III for each student, add the amounts from line 30 and enter the total in Part I. Use your adjusted gross income (AGI) to see if you’re within the income limits. If you qualify, part of the credit (up to 40%) may be refundable and reported on your tax return.
Part II – Nonrefundable Education Credits
This part includes the remaining portion of the American Opportunity Credit (if applicable) and the Lifetime Learning Credit. You’ll enter the qualified education expenses and apply a 20% rate (up to $2,000 maximum). Income phaseouts also apply here, based on your filing status and AGI.
Part III – Student and Institution Information
Complete a separate Part III for each student. Include their name, Social Security number, the educational institution’s name, address, and EIN, and whether they received a Form 1098-T. Then answer questions to confirm eligibility, such as whether the student was enrolled at least half-time and if they’ve claimed the credit in prior years.
If the student qualifies, calculate their adjusted qualified education expenses. Up to $4,000 in eligible expenses can be used to compute the American Opportunity Credit or the Lifetime Learning Credit — but not both for the same student in the same year.
Form 8863 Example
Let’s say you’re a college student who spent $4,000 on tuition and books in 2024. If you meet all eligibility criteria for the American Opportunity Credit, you could claim:
- 100% of the first $2,000 = $2,000
- 25% of the next $2,000 = $500
How Form 8863 Fits Into Your Bigger Tax Picture
Using Form 8863 properly can significantly reduce your tax bill, especially for families supporting college students. The American Opportunity Credit and Lifetime Learning Credit aren’t just helpful—they’re strategic tools for long-term tax savings.
If you’re juggling tuition payments, scholarships, and complex financial aid details, your taxes can get messy. While filing the form itself might be best handled via tax software or an enrolled agent, you don’t have to manage the broader picture alone.
Make Every Education Dollar Count
When it comes to maximizing your return, understanding forms like Form 8863 is just one piece of the puzzle. At The Mad Tax, we help clients make sense of tax rules, deductions, and credits, so they can file smarter—not harder. Whether you’re claiming education credits or just want clarity on what impacts your tax return, we’re here to guide you. Get in touch and let us help you turn confusing tax codes into real-world savings.