The oldest graduated from high school. Between the excitement of the college acceptance and the dread of tuition arrives a pile of forms with acronyms: FAFSA, 1098-T, AOTC. And a question nobody answers at orientation: what do my taxes have to do with my child’s college?
A lot. Your family’s taxes decide two things at once: how much tax credit you can claim for education expenses, and how much financial aid your child can receive through the FAFSA. Let’s take it apart piece by piece.
The IRS’s two education credits
The IRS offers two credits for higher education expenses. They’re not the same thing, and choosing well between them is real money:
American Opportunity Credit (AOTC). The most generous: up to $2,500 per eligible student per year. It’s calculated as 100% of the first $2,000 in qualified expenses plus 25% of the next $2,000. And it has a superpower: it’s partially refundable: up to 40% ($1,000) can come back to you in cash even if you owe no taxes. It applies only to the first four years of higher education, the student must be enrolled at least half-time in a program leading to a degree, and they can’t have felony drug convictions.
Lifetime Learning Credit (LLC). Up to $2,000 per return (not per year) (20% of the first $10,000 in qualified expenses). It’s more flexible: it has no year limit, it works for graduate courses or professional training, and the student can be enrolled in a single course. But it’s not refundable: it only reduces your tax to zero, with no cash refund.
The golden rule: you can’t claim both credits for the same student in the same year. You have to choose the one that gives more. For a typical undergraduate student, the AOTC almost always wins.
The income limits (and why you have to check them)
Both credits phase out when income is high. In 2026 numbers: the AOTC and the LLC phase out when your modified adjusted gross income (MAGI) is below $80,000 if you’re single or $160,000 if filing jointly; the credit gradually decreases and disappears completely above $90,000 ($180,000 jointly).
These thresholds are set by law and don’t adjust for inflation each year like other tax amounts, so check them at irs.gov before filing: eligibility rules can be updated. And a filing-status detail: if you file as married filing separately, you can’t claim either one.
Form 1098-T: your base document
The college will send you each January Form 1098-T (Tuition Statement), with the amounts of tuition billed and scholarships received. It’s the base document for calculating the credits: your preparer (or your software) needs it to determine the real qualified expenses.
Two practical warnings: first, not all qualified expenses are tuition and required materials: room, board, and transportation don’t count even if they cost more than tuition. Second, if scholarships cover all the tuition, there may be no qualified expense left to claim a credit against: tax-free scholarships reduce the calculation base.
The FAFSA: your taxes decide your child’s aid
The FAFSA (Free Application for Federal Student Aid) is the free application for federal student aid: grants, subsidized loans, and work-study programs. And it works with your taxes: the application uses the family’s tax information to calculate how much aid the student needs.
The modern FAFSA system connects directly with the IRS to pull your return’s data, so filing on time with correct data is no longer just a tax matter: it’s a college aid matter. If your taxes are late or have errors, your child’s FAFSA is delayed or miscalculated. And if your child is a dependent for FAFSA purposes (most undergraduates are), the parents’ data is used, whether they like it or not.
The calendar tip: the FAFSA opens each year on October 1 for the following academic year. Filing it early matters because some state and institutional aid runs out. Your taxes for the corresponding year must be ready before that.
Keep education receipts like gold
Qualified education expenses are proven with papers: keep the 1098-T from each year, the tuition and required books receipts, and the record of scholarships received. If the IRS questions your education credit, these documents are your defense. And if your child works while studying, their own income doesn’t affect your ability to claim the credit as long as they’re still your dependent.
What to do today, in order
- If your child starts college, make sure you receive Form 1098-T in January and keep it.
- Decide which credit suits you for each student: AOTC for typical undergraduates, LLC for graduate school or single courses (never both for the same student).
- Verify that your MAGI is within the limits before counting on the credit.
- File the FAFSA on time with your correct tax data: your child’s aid depends on it.
To keep learning, check our guide on Deductions people forget.
This content is informational and is not tax advice. For your particular case, consult the official sources or an authorized professional.
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