Graduate student with the Lifetime Learning Credit
A single W-2 employee taking graduate courses part time while her employer covers part of the tuition. The American Opportunity Credit is off the table, so the education credit is the Lifetime Learning Credit, figured on expenses reduced by the employer's tax-free assistance.
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Taxpayer facts
Who this is and what their year looked like.
Imani is single, 34, and works full time as a clinical data analyst at a hospital system in Tacoma. In 2025 she took two graduate courses each semester, spring and fall, toward a Master of Public Health.
Her employer paid part of her tuition directly to the university under its written educational assistance program, and she paid the rest herself. She also bought course materials, textbooks and a parking permit. She has one W-2, takes the standard deduction, and nobody claims her as a dependent.
Source documents
The 4 documents you will prepare the return from: W-2 (Wage and Tax Statement), 1098-T (Tuition Statement), Educational assistance statement: Puget Sound Regional Health, Taxpayer's records: other education costs.
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Objectives
What a correct return should capture.
- File as Single, and confirm Imani is not claimable as anyone else's dependent and is not filing married filing separately (either one would bar the education credit).
- Report the W-2, Box 1 wages on Form 1040, line 1a. Confirm the employer educational assistance is already excluded from Box 1 and is not added back as income.
- Work through Form 8863, Part III, lines 22 to 26 for Imani and the university, and decide whether the American Opportunity Credit is available. If it is not, go to line 31 for the Lifetime Learning Credit.
- Figure her adjusted qualified education expenses for line 31. Start from what she paid for tuition and required fees, decide which of her other costs qualify (for this credit, books, supplies and equipment count only if they must be paid to the institution as a condition of enrollment or attendance), then reduce the total by the tax-free educational assistance from her employer.
- Complete Form 8863, Part II, lines 10 to 18: 20% of up to $10,000 of adjusted qualified expenses, then the modified AGI test using the 2025 single phase-out range of $80,000 to $90,000.
- Run the Credit Limit Worksheet in the Form 8863 instructions against her tax on Form 1040, line 18, and carry the nonrefundable credit to Form 8863, line 19 and Schedule 3, line 3. Remember the Lifetime Learning Credit has no refundable part.
- Apply the 2025 single standard deduction ($15,750), use the tax tables, and reconcile her withholding to the refund or balance due.
- Note that Washington has no state income tax, so there is no state return here.
Check your work
The answer key and the complete return, the way a real client receives it: the 1040 and its schedules, the workpapers behind every number, and the signature forms.
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