Here’s what HIVE AI had to say about “What are the IRS educational benefits for college and grad students?”:
IRS educational benefits for college and graduate students
Education credits
- American Opportunity Tax Credit (AOTC): For the first four years of postsecondary education; must be at least half-time in a degree or credential program and have not completed the first four years before the tax year. Generally not available once you’re in graduate study because of the “first four years” rule. Claim on Form 8863 with your Form 1040. See coordination rules with other benefits below. 1
- Lifetime Learning Credit (LLC): For undergraduate, graduate, and professional courses, including courses to improve job skills; no limit on the number of years you can claim it. You must substantiate enrollment and qualified tuition and related expenses, and typically need a Form 1098‑T from the school. 1
- Coordination and dependency rules: You must reduce the expenses used for AOTC/LLC by any tax‑free educational assistance (for example, tax‑free scholarships, Pell Grants, or employer educational assistance), and if someone else can claim you as a dependent, they (not you) generally claim the credit. 2
No “double-dipping” on education benefits
- You can’t use the same dollar of qualified education expenses to claim multiple tax benefits (for example, both a credit and a 529 distribution). Start with total qualified expenses, subtract tax‑free educational assistance, then use the remainder toward one benefit. Tip: In some cases, you may choose to include part of an otherwise tax‑free scholarship in income to free up expenses for a larger credit. 3
Student loan interest deduction
- You may deduct interest paid on qualified student loans for undergraduate or graduate education, subject to income limits. See Publication 970’s overview table for eligibility and phaseouts. 1
Tax‑advantaged education savings
- 529 Plans (Qualified Tuition Programs) and Coverdell ESAs: Tax‑free growth; distributions are tax‑free when used for qualified education expenses. Publication 970 summarizes eligibility and the interaction with credits (and notes Coverdell and QTP availability for both undergraduate and graduate education). 1
Employer‑provided educational assistance (including student loan repayment)
- Educational assistance programs can pay for tuition, fees, books, supplies, and equipment for undergraduate or graduate study tax‑free to the employee. They may also be used (within statutory limits) to pay employees’ qualified education loans (principal and interest); these payments can be made to the lender or the employee and are excludable from income when provided under a qualifying plan. The exclusion for employer student loan repayment was extended by the One Big Beautiful Bill Act (Public Law 119‑21). 4
Scholarships, fellowships, grants, and tuition reductions
- Scholarships/fellowships and similar grants can be tax‑free when used for qualified tuition and required fees (but reduce the expenses you can use to claim credits). Publication 970’s table highlights the general treatment for “Scholarships, Fellowship Grants, Grants, and Tuition Reductions.” 1
- Qualified tuition reduction for employees of educational institutions: Tuition reductions for education below the graduate level are generally excludable for employees, spouses, and dependents. Graduate tuition reduction is excludable only for graduate students of the employing institution who perform teaching or research activities; other graduate tuition reductions are taxable. Nondiscrimination rules apply for highly compensated employees. 5
Education exception to the 10% early IRA distribution tax
- Early IRA withdrawals used for qualified higher education expenses for yourself, your spouse, children, or grandchildren avoid the 10% additional tax (though income tax may still apply to taxable amounts). “Qualified higher education expenses” align with section 529 definitions and must be at an eligible educational institution. 6
Business deduction for work‑related education
- If you’re working, certain education costs that maintain or improve skills required in your current job, or are required by your employer or law to keep your current salary, status, or job, can be deductible. The education can’t be to meet the minimum requirements of your trade/business or qualify you for a new trade/business. 1
Where to learn more and get tools
- IRS Education Benefits Information Center: Central hub for education credits and related benefits, including LLC and AOTC resources. 7
- The IRS page covering education credits and resources also directs students to the Lifetime Learning Credit overview and the broader education benefits center. 8
Sources
1 – IRS – Publication 970 Tax Benefits for Education đź“„ Summarize
2 – IRC § 25A(g) đź“„ Summarize
3 – IRS Credits and Deductions – No double education benefits allowed đź“„ Summarize
4 – IRS.gov – Employee benefits đź“„ Summarize
5 – IRS.gov – Qualified tuition reduction đź“„ Summarize
6 – IRC § 72(t) đź“„ Summarize
7 – IRS.gov – Tax information for students đź“„ Summarize
8 – IRS.gov – EITC social media messages, image and videos đź“„ Summarize
Try Your AI Tax Assistant for Free!
Ready to transform your practice with agentic AI in tax? See firsthand how our cutting-edge AI tax tools can revolutionize your approach to tax research and planning.