Education, business, and specialized tax credit

Education and income credits

Definitions

Postsecondary education

Education pursued after high school, including programs at colleges, universities, vocational schools, and other accredited institutions. For AOC purposes, this refers to the first four years of undergraduate-level study at an eligible institution.

Eligible educational institution

Any accredited college, university, vocational school, or other postsecondary institution eligible to participate in federal student aid programs administered by the U.S. Department of Education.

Education credits

American opportunity credit

• The American opportunity credit (AOC) is partially refundable and the Lifetime learning credit is nonrefundable. The credit applies to the first four years of postsecondary education at an eligible educational institution received by a taxpayer, a taxpayer’s spouse, and taxpayer’s dependents. The student must be enrolled at least half-time in a program leading to a degree or other recognized credential.
• The AOC offers a refundable portion of up to 40% of the total $2,500 credit, which equals $1,000 for eligible individuals. Taxpayers who have a zero tax liability can still receive the refundable portion of the credit.
• For 2025, the MAGI phase-out range for unmarried individuals is $80,000 to $90,000.
  The MAGI phase-out range for married couples filing jointly is $160,000 to $180,000.
  AOC is not available to taxpayers who use the married filing separately filing status.

Definitions

MAGI phase-out

A gradual reduction of a tax credit or deduction as a taxpayer’s modified adjusted gross income (MAGI) rises above a set threshold. Once MAGI exceeds the upper limit of the phase-out range, the benefit is completely eliminated.

• For the education credits, modified adjusted gross income (MAGI) is your adjusted gross income plus any foreign earned income exclusion, foreign housing exclusion or deduction, and excluded income of bona fide residents of American Samoa or Puerto Rico.

  Expenses that qualify for AOC: Tuition Mandatory enrollment fees Books Course-related fees Required course-related materials

  Expenses that do not qualify for AOC: Dormitory, off-campus housing, room & board Meals Travel to and from college campus Athletic activity fees Insurance

Most tuition and scholarship or grant monies received by an eligible educational institution will be reported on Form 1098-T. The credit is 100% of the first $2,000 of qualified expenses and 25% of the following $2,000 qualified expenses- maximum $2,500 credit per year per student. Any amount of tuition paid by scholarship, grants, and fellowships that exceed qualified expenses is income which is taxable to the student, reported on Schedule 1, Form 1040.

Definitions

Form 1098-T (Tuition Statement)

An IRS form issued by eligible educational institutions reporting the amount of qualified tuition and related expenses paid or billed during the tax year, along with any scholarships or grants received. Taxpayers use this form to determine their eligibility for education credits.

Lifetime learning credit

The lifetime learning credit (LLC) provides a credit equal to 20% of qualified tuition expenses, up to a $2,000 credit limit per tax return each year, and applies to any number of years of higher education. Unlike the AOC, the LLC doesn’t require pursuit of a degree - courses taken to maintain or improve job skills also qualify. For 2025, the LLC uses the same MAGI phase-out as the AOC ($80,000 to $90,000 for unmarried individuals; $160,000 to $180,000 for married filing jointly), and like the AOC, it is not available to taxpayers who use the married filing separately filing status. For more information about both education credits, visit the IRS Education Credits page for the AOC and LLC.

Residential energy credits

Form 5695 figures two nonrefundable 30% credits for energy improvements to a home in the United States. P.L. 119-21 ended both after 2025, so both apply to 2025 returns: the energy efficient home improvement credit is not allowed for property placed in service after December 31, 2025, and the residential clean energy credit is not allowed for expenditures made after December 31, 2025.

Energy efficient home improvement credit (IRC §25C)

• $1,200 annual limit for insulation, exterior doors, windows and skylights, central air conditioners, gas, propane, or oil water heaters, furnaces, and boilers, electrical panel upgrades, and home energy audits. Sub-limits: $600 per item of energy property, $600 for all windows and skylights, $250 per door ($500 for all doors), and $150 for an audit.
• Separate $2,000 annual limit for heat pumps, heat pump water heaters, and biomass stoves and boilers, for a maximum of $3,200 a year. No lifetime limit.
• Home: an existing home (not new construction) used as the taxpayer’s residence; windows, doors, and insulation must go in a main home the taxpayer owns.
• QMID requirement: for energy property, windows, skylights, and exterior doors placed in service in 2025, the item must come from a qualified manufacturer and the taxpayer must report its four-character qualified manufacturer identification number (QMID). No QMID, no credit for that item.
• No carryforward: unused credit is lost.

Residential clean energy credit (IRC §25D)

• Solar electric, solar water heating, small wind, geothermal heat pump, battery storage, and fuel cell property, including installation labor. Battery storage must have a capacity of at least 3 kilowatt hours; it doesn’t have to be charged by solar panels.
• No annual or lifetime dollar limit, except fuel cell property ($500 per half kilowatt of capacity).
• New or existing homes, including a second home the taxpayer lives in (fuel cells: main home only).
• Unused credit carries forward to later years.

Fuel tax credit

The fuel tax credit, claimed on Form 4136, refunds the federal excise tax paid on fuel used for nontaxable purposes, such as off-highway business use and farming. It’s a business credit - individuals generally can’t claim it for personal, everyday vehicle use.

Earned income tax credit

The earned income tax credit is covered in Family and income-based tax credits.