Form 8863 Education Credits Checklist for Tax Year 2020 Tips

in 2020. The Internal Revenue Service offers two distinct credits through this form: the American

Opportunity Tax Credit and the Lifetime Learning Credit. Each credit has different eligibility requirements, phase-out thresholds, and calculation methods. Taxpayers must complete Form

8863 and attach it to Form 1040 or Form 1040-SR to claim either credit.

Verifying Student Eligibility and Educational Institution

Requirements

You must confirm that the student attended an accredited educational institution eligible to participate in federal student aid programs administered by the Department of Education. Obtain the academic institution's employer identification number from Form 1098-T or by contacting the school directly.

You can verify institutional eligibility by checking the Department of Education's Database of

Accredited Postsecondary Institutions and Programs. Record the student's name and Social

Security number exactly as they appear on your tax return.

Taxpayers must provide the educational institution's employer identification number on Form

8863 when claiming the American Opportunity Credit. Only one credit per eligible student per taxable year is permitted, and taxpayers cannot claim both credits for the same student in the same year.

Understanding Modified Adjusted Gross Income

Phase-Out Rules

For single filers, eligibility for the American Opportunity Credit begins to phase out once modified adjusted gross income exceeds $80,000 and ends entirely at $90,000. Married taxpayers filing jointly face a higher range, with the credit reduced between $160,000 and

$180,000. These income limits have remained fixed since 2009 and are not adjusted for inflation.

To determine whether you fall within the allowable range, start with the amount reported on

Form 1040, line 11, and add back any excluded foreign earned income or income from Puerto

Rico. As income rises within the phase-out range, the credit decreases proportionally and is eliminated once the upper threshold is reached.

Taxpayers whose income falls near the midpoint of the range generally receive about half of the calculated credit. Once the modified adjusted gross income reaches or exceeds the top limit, the

American Opportunity Credit is no longer available.

Calculating Qualified Tuition and Related Expenses

Eligible education expenses consist of tuition, mandatory enrollment fees, and course-related books and supplies paid during 2020 for academic periods that begin in 2020 or in the first three months of 2021. Under the American Opportunity Credit rules, course materials qualify regardless of whether they are purchased directly from the educational institution or from an outside retailer.

Different limitations apply when claiming the Lifetime Learning Credit, which allows books and supplies only if the institution requires their purchase as a condition of enrollment. Room and board, transportation costs, medical insurance, and student activity fees remain nonqualifying unless payment is mandatory for enrollment.

Education expenses paid with student loan proceeds remain eligible for credits, even though the related loan interest may be deducted separately on Schedule A. When determining qualified education expenses for the taxable year, include only amounts actually paid in 2020.

Applying Scholarships and Grants From Form 1098-T

You will receive Form 1098-T from each educational institution where the student enrolled during 2020. Box 1 reports payments received for qualified tuition and related expenses during the calendar year, while Box 5 reports the total scholarships or grants the institution administered or processed.

Subtract the Box 5 amount from your total qualified expenses before calculating your education credit. Scholarships reduce qualified expenses in the year received, and any excess scholarship amount over qualified expenses may become taxable income to the student.

Evaluating the Lifetime Learning Credit as an Alternative

When income limits or prior-year restrictions prevent use of the American Opportunity Credit, another option may be available through the Lifetime Learning Credit. This benefit equals 20 percent of qualifying education expenses, capped at $10,000, resulting in a maximum credit of

$2,000 per tax return, regardless of how many students are claimed.

Income eligibility for this credit begins to phase out between $59,000 and $69,000 for single filers and between $118,000 and $138,000 for married taxpayers filing jointly. Unlike the

American Opportunity Credit, no portion of the Lifetime Learning Credit is refundable, meaning it can reduce tax liability only to zero and cannot generate a refund.

Completing Form 8863 Part III and Calculating Credit

Amounts

Complete a separate Part III on page 2 of Form 8863 for each student before filling out Parts I and II. Enter the student's name and Social Security number as shown on your return, and provide the educational institution's address and employer identification number in the designated fields.

Answer all eligibility questions regarding half-time enrollment, completion of the first four years of postsecondary education, and felony drug convictions. Calculate adjusted qualified education expenses by subtracting scholarships and grants from total qualified expenses.

The American Opportunity Credit equals 100 percent of the first $2,000 of qualified education expenses, plus 25 percent of the next $2,000 of qualified education expenses. This calculation generates a maximum $2,500 credit per eligible student before applying any income-based phase-out reductions.

Applying Phase-Out Calculations on Form 8863 Part I

Lines 2 through 6 of Part I contain the phase-out calculation for the American Opportunity

Credit. Enter the applicable threshold amount on line 2: $90,000 for single filers or $180,000 for married filing jointly, then enter your modified adjusted gross income on line 3.

Line 4 calculates the difference between your income and the threshold, while line 5 shows the phase-out range of $10,000 for single filers or $20,000 for married filing jointly. Divide line 4 by line 5 to determine your phase-out percentage on line 6. Multiply your tentative credit from line 1

by the line 6 percentage to calculate your allowed credit on line 7. This final amount represents your education credit after all phase-out adjustments have been applied.

Routing Credits to Form 1040 and Schedule 3

Any refundable portion of the American Opportunity Credit moves from Form 8863, line 8, directly to Form 1040 or Form 1040-SR, line 29. This refundable amount equals 40 percent of the allowable credit after applying the income phase-out rules, with a maximum refund of

$1,000.

Nonrefundable education credits follow a separate path, transferring from Form 8863, line 19, to

Schedule 3, line 3. Only credits that reduce tax liability without producing a refund are reported on Schedule 3.

Both the American Opportunity Credit and the Lifetime Learning Credit must be used in the year earned, as neither allows carry forward to future tax years. Any nonrefundable credit that exceeds the current year’s tax liability is forfeited and cannot be applied to later returns.

Coordinating Multiple Tax Benefits for Higher Education

Form 8863 includes a Credit Limit Worksheet that explains how education credits interact with other college-related tax benefits. Education credits are not allowed for expenses paid using tax-free distributions from 529 plans or Coverdell Education Savings Accounts.

No education expense may be used more than once for federal tax purposes. Amounts applied toward education credits cannot also support higher education deductions on Schedule C or be claimed as other business-related education expenses. By requiring separate allocation of each dollar, the worksheet prevents double-dipping and ensures that every qualified expense receives only one federal income tax benefit.

If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.

• Full IRS transcript retrieval (Wage & Income + Account)
• Professional tax form review
• Preparation & filing support
• Tax relief options if you owe the IRS