Navigating Tax Credits: Child Care, Dependent Care, and Education Expenses

Understanding the various tax credits available to families can be complex, but it's essential for maximizing financial benefits. This article clarifies the Child and Dependent Care Credit and explores education-related tax credits such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), providing a comprehensive guide for parents and caregivers.

Child and Dependent Care Credit

The Child and Dependent Care Credit is designed to help offset the expenses associated with caring for qualifying individuals, allowing parents and caregivers to work or look for work. This credit can range from 20% to 35% of qualified expenses, depending on your adjusted gross income (AGI).

Eligibility Requirements

To claim this credit, several criteria must be met:

Filing Status: If married, you and your spouse usually file as Married Filing Jointly (MFJ).
Earned Income: If you’re married and living together, both you and your spouse must have earned income. Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed.
Household Maintenance: You paid more than half the cost of maintaining a household for the year.
Qualifying Person: You must pay for care for one or more qualifying people, including:
- A dependent who’s a qualifying child and under age 13 when you pay for the care (This age limit does not apply for a child who is disabled).
- Usually, you must be able to claim the child as a dependent to receive the credit. However, an exception applies for children of divorced or separated parents. In those situations, the child is the qualifying child of the custodial parent for purposes of this credit.

Qualified Expenses

Qualified child- or dependent-care expenses are those you incur while you work (or look for work). These expenses can include:

Expenses for care provided outside of your home.
If the qualifying person receives the care in a dependent-care center, such as a daycare facility, the center must comply with all relevant state and local laws. A dependent-care center is one that cares for more than six people for a fee.
The cost of before- or after-school programs might qualify if the program is for the care of the child.
Education costs below kindergarten qualify if you can’t separate those costs from the cost of care.

Employer-Provided Benefits

Some employers provide child care benefits, which you may qualify for in addition to the Child and Dependent Care Credit. Employer-provided benefits are excluded from income up to $5,000 ($2,500 if married filing separately and not considered unmarried). If your benefits exceed this amount, your employer will report the excess over $5,000 as taxable income in Box 1 of your W-2.

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Some employers offer Section 125 plans, also called cafeteria plans or Flexible Spending Accounts (FSAs). They allow employees to reduce their salaries for one or more nontaxable benefits. Your W-2, Box 10 will show the amount of child and dependent care benefits your employer provided. You can’t use expenses paid or reimbursed with these benefits to also claim the Child and Dependent Care Credit.

To calculate the credit when you have employer-provided benefits:

Start with the maximum creditable expense allowed ($3,000 for one qualifying person or $6,000 for two or more qualifying persons).
Subtract the Box 10 amount from the expense amount.

For example, suppose you spent $6,000 on daycare for two qualifying persons and received $5,000 in dependent care benefits from your employer - including either direct reimbursements or contributions to an FSA. That leaves just $1,000 to calculate the Child and Dependent Care Credit, assuming that your AGI (or your spouse’s, if you’re married) is more than $1,000.

Claiming the Credit

To claim this credit, you need to fill out Form 2441 (Form 1040), Part III, especially when your W-2 shows dependent care benefits.

Child and Dependent Care Tax Credit vs. Child Tax Credit

Both of these federal credits support working families with young children, and with similar names it’s no surprise they’re often confused. The Child and Dependent Care Tax Credit is aimed at supporting families to offset the costs associated with child care or care for a dependent with a disability. It is a credit that is provided to qualifying taxpayers who pay for child or dependent care expenses. Another difference is that the Child and Dependent Care Credit is nonrefundable, meaning that the credit can never exceed your tax liability. However, with the Child Tax Credit, you may receive part of the credit even if it exceeds your tax liability.

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Education Tax Credits

Education tax credits help decrease the costs of higher education by reducing the amount of taxes households with eligible students owe. In some cases, filers can even qualify for tax refunds. Parents can deduct certain college expenses on their taxes, like tuition, fees, and sometimes interest on student loans.

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.

This credit can make education more affordable for lower-income families and students who might not otherwise be able to attend college. It is available for students pursuing a degree and enrolled at least part-time during an academic period (e.g. a quarter, semester, or trimester).

Requirements for AOTC

The student:

Is pursuing a program leading to a degree or another recognized education credential.
Is enrolled for at least one academic period beginning in the tax year. Academic periods can be semesters, quarters, or any other period of study as defined by the school. For the AOTC, students must be enrolled at least part-time, whereas for the LLC, students must be enrolled in at least one course.
Has not claimed any education tax credits for four prior tax years.
Has not completed 4 years of higher education before 2025.
Does not have a felony drug conviction.
Has a Social Security number issued on or before the due date (including extensions) of the tax return.
Provides the educational institution’s employer identification number (EIN) on Form 8863.
Is a U.S. resident for the entire year. For more information see IRS Education Credits Q&A.

MAGI Requirements for AOTC

They have modified adjusted gross income (MAGI) in 2025 less than the following amounts:

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Single Filers: $90,000
Married Filers: $180,000

If your MAGI is $80,000-$90,000 (single filers) or $160,000-$180,000 (married filers), your credit amount will be reduced. You cannot claim the AOTC or Lifetime Learning Credit if your income is more than these amounts.

Benefits of AOTC

The AOTC is worth up to $2,500. The AOTC is figured by taking the first $2,000 paid towards the student’s qualified educational expenses and adding 25 percent of the next $2,000 in educational expenses, up to $2,500.

The AOTC is calculated per student, not per tax return. So, parents with two (or more) qualifying children in a given year can claim a separate credit for each child (if income limits are met).

Up to $1,000 (or 40 percent of the total credit) is refundable even if a filer doesn’t owe income tax. If you don’t owe any taxes, you will receive the entire $1,000 as part of your tax refund. If tax is owed, the balance of the credit is used to reduce the filer’s tax liability first and then any remaining amount will be sent as part of your tax refund.

For example, Maggie earned $28,000 in 2025 and attended college half-time working toward her degree. Her tuition for the year was $5,000. She owes $1,232 in federal income tax. She qualifies for a maximum AOTC of $2,500 (first $2,000 in expenses + 25% of the next $2,000 in expenses):

Maggie qualifies for a refundable credit of $1,000 (40% of $2,500), which is subtracted from her maximum credit of $2,500, leaving a balance of $1,500.
The non-refundable $1,500 portion is applied to her $1,232 tax bill, which reduces her tax bill to $0. (Since this part of the credit is non-refundable, Maggie doesn’t get the remaining $268.)
Now that Maggie no longer owes any taxes after the non-refundable portion of the credit is applied, she will receive the $1,000 refundable portion as part of her tax refund.

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses - including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit.

For students not pursuing a degree, the Lifetime Learning Credit (LLC) is available at any point in their post-secondary education. Workers may use the LLC to improve job skills which can increase their earning ability.

Requirements for LLC

The student is enrolled for at least one academic period beginning in the tax year. Academic periods can be semesters, quarters, or any other period of study as defined by the school. For the AOTC, students must be enrolled at least part-time, whereas for the LLC, students must be enrolled in at least one course.
Any tertiary education qualifies, including career development courses, with no minimum enrollment and no limit on years of study.

MAGI Requirements for LLC

They have modified adjusted gross income (MAGI) in 2025 less than the following amounts:

Single Filers: $90,000
Married Filers: $180,000

Benefits of LLC

The credit is 20 percent of the first $10,000 of qualified educational expenses, up to $2,000 per household, regardless of the number of eligible students in the family. Unlike the AOTC, this credit is non-refundable.

Qualified Education Expenses

Qualified educational expenses include:

Tuition - the amount of tuition after tax-free contributions have been subtracted, such as:
- Scholarships
- Fellowships
- Pell Grants
- Veterans Assistance
- Employer assistance
Student fees and expenses required for enrollment
Books, supplies, and course-related materials, even if they are not purchased from the school

The following do not count as qualified educational expenses:

Insurance
Medical expenses
Room and board
Transportation
Other living or family expenses
Child care

Claiming Education Credits

To claim either tax credit, filers must submit Form 8863, “Education Credits” with their tax return.

Students usually receive a Form 1098-T, “Tuition Statement” from their institution by January 31st of the following year. If you received a Form 1098-T, this statement provides information that will help you figure your credit. The form will have an amount in Box 1 to show the amounts received during the year. However, the amount on Form 1098-T might be different from the amount you actually paid and are deemed to have paid. The form may not reflect the total or accurate amount of qualified education expenses you can claim. For information on what amount to claim, see qualified education expenses in Tax Benefits for Education, Pub. 970. Check the form to make sure it’s correct. If you didn’t receive Form 1098-T, you may still be eligible to claim a credit.

Coordination with Pell Grants and Other Scholarships

Note: Students can decide how to allocate their education expenses so that it benefits them. When Pell Grants or other scholarships are used to pay tuition, they are considered tax-free income, but those tuition expenses may not be claimed for the AOTC. In some situations, it is more helpful to put the Pell Grant (or other scholarship) toward living expenses. The Grant will then be taxable to the student, but the larger AOTC may more than offset any increase in tax. See, “Coordination with Pell Grants and other scholarships” in IRS Publication 970, “Tax Benefits for Education.”

Key Differences Between AOTC and LLC

AOTC: Available ONLY if the student hasn’t completed the first 4 years of postsecondary education.
LLC: Any tertiary education qualifies, including career development courses, with no minimum enrollment and no limit on years of study.
Refundability: The AOTC can be partially refundable, while the LLC is non-refundable.
Credit Amount: The AOTC offers up to $2,500 per student, while the LLC offers up to $2,000 per tax return.

General Rules for Claiming Credits

You can claim only one of the credits per qualifying student.
You can claim both the AOTC and LLC on the same return only if they are not for the same student and the same expenses.

Tax Credits vs. Tax Deductions

Tax credits directly reduce the amount of tax you owe, while deductions lower your taxable income. As a parent paying for your child’s education, you can access two powerful tax breaks.

Additional Considerations

Earned Income Tax Credit (EITC): While not education-specific, parents with lower incomes and multiple children may qualify for this refundable credit (up to $8,231 for 2026).
Student Loan Interest Deduction: You can deduct up to $2,500 per year in student loan interest paid on loans for yourself, your spouse, or a dependent. Note: This deduction can only be claimed once.
529 Plans: Qualified withdrawals (for tuition, room and board, books, and supplies) are tax-free at the federal level. Pro tip: Start early. The earlier you invest, the more time your savings have to grow tax-free.

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