Education Credits: A Comprehensive Guide For 2025

The expense of education has increased, and attending school can be expensive. The good news is that you may qualify for education credits that might reduce your tax liability if you are enrolled in school or have a dependant. By directly reducing taxes, these credits put more money in your pocket rather than going to the IRS. To help you understand how the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) operate, who is eligible, and how to apply for them, I will break down the two primary education credits that are available. This will guarantee that you're taking full advantage of these tax-saving options.

What Are Education Credits?

One useful tax benefit that might lower your tax liability is education credits. Education credits reduce your tax obligation dollar-for-dollar, which means they immediately cut the amount of tax you must pay, in contrast to tax deductions, which lower your taxable income. They are therefore an effective tool for students and their families trying to defray the expense of a college education.

Two primary education credits are available under the U.S. tax system. Specifically created for undergraduate students, the American Opportunity Tax Credit (AOTC) provides significant financial assistance for individuals seeking degrees. However, the Lifetime Learning Credit (LLC) offers greater flexibility and can be used by individuals pursuing courses to improve their employment skills, graduate students, and part-time students. You can optimize your tax savings by being aware of how these credits operate and which one applies to your circumstances.

Read more about Retirement Savings Contribution Credit.

American Opportunity Tax Credit (AOTC)

One of the most generous education credits available is the AOTC, which is intended to assist students during their first four years of college. This benefit can offer substantial tax relief if you or your dependant are enrolled in a degree program.

How Much Can You Get?

The AOTC can provide up to $2,500 per student per year. Here's a breakdown of how the credit is calculated:

As you can see, if you spend $4,000 on tuition and materials, you can receive the full $2,500 credit.

Who Qualifies for the AOTC?

The student must fulfil certain qualifying requirements in order to be eligible for the American Opportunity Tax Credit (AOTC). They must be in the first four years of their post-secondary education and enrolled at least half-time in an accredited degree or education program. The student must also be free of criminal drug convictions. Another important factor in deciding eligibility is income constraints. People who have a Modified Adjusted Gross Income (MAGI) of $80,000 or less for single filers and $160,000 or less for joint filers are eligible for the credit. However, for joint filers making between $160,000 and $180,000 and for single taxpayers with a MAGI between $80,000 and $90,000, the benefit starts to phase away. The AOTC is not available to anyone who earn more than these limits.

Read more about Employee Retention Credit (ERC).

What Expenses are Covered?

The AOTC covers:

• Tuition and fees required for enrollment.

• Required books, supplies, and equipment (even if purchased separately).

However, the AOTC does not cover room and board, transportation, or medical expenses.

Refundable Feature of the AOTC

One of the major benefits of the AOTC is that 40% of the credit is refundable, meaning that even if you don’t owe taxes, you could still receive up to $1,000 back.

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit (LLC) is more adaptable and can be applied to a variety of educational costs, even if the AOTC is great for students. Graduate students, part-time students, and students studying courses connected to their jobs can all use the LLC.

How Much Can You Get?

The LLC provides up to $2,000 per tax return, not per student. The credit is calculated as 20% of the first $10,000 spent on qualified education expenses. Here’s a breakdown:

Unlike the AOTC, the LLC offers a lower credit amount, but it has fewer restrictions.

Who Qualifies for the LLC?

The student may be enrolled in undergraduate, graduate, or career-related courses to be eligible for the Lifetime Learning Credit (LLC). It is a more flexible alternative for working professionals and part-time students than the American Opportunity Tax Credit (AOTC) because it does not require full-time enrolment. The LLC's ability to be claimed for an indefinite number of years, as opposed to the AOTC's restriction to the first four years of post-secondary school, is another significant benefit. This credit has income restrictions as well. Your Modified Adjusted Gross Income (MAGI) must be $80,000 or less if you are filing alone, or $160,000 or less if you are filing jointly, in order to be eligible for the entire LLC. It is crucial to verify your eligibility before claiming the credit because it starts to taper down if your income surpasses these thresholds.

What Expenses are Covered?

The LLC covers:

• Tuition and fees required for enrollment.

• Required books, supplies, and equipment.

However, like the AOTC, it does not cover room and board, transportation, or personal expenses.

Non-Refundable Credit

Unlike the AOTC, the LLC is non-refundable, meaning you won’t receive any money back if your tax liability is already reduced to zero. However, it can still reduce your tax bill significantly.

Which One Should You Choose?

The AOTC generally provides a larger credit and includes a refundable portion, making it a better option for most undergraduates. However, if you are taking graduate courses or part-time classes, the LLC may be a better fit for you.

Student Loan Interest Deduction 2025

While education credits help reduce the cost of tuition, many students also rely on loans to fund their education. If you’re paying off student loans, you may be eligible for the Student Loan Interest Deduction, which can help lower your taxable income.

How Much Can You Deduct?

The Student Loan Interest Deduction allows you to deduct up to $2,500 per year in interest paid on a qualified student loan. This deduction directly reduces your taxable income, which can lower the amount of tax you owe. Unlike education credits, this is a deduction, not a credit, so it reduces the income subject to tax rather than directly cutting your tax bill.

Who Qualifies for the Deduction?

To be eligible for the Student Loan Interest Deduction, the loan must have been taken out exclusively for educational expenses and used for tuition, fees, books, and other necessary costs. The student must have been enrolled at least half-time in a degree program at the time the loan was issued. This deduction applies to both federal and private student loans, providing relief to a wide range of borrowers. Income limits also determine eligibility. To claim the full deduction, your Modified Adjusted Gross Income (MAGI) must be $75,000 or less if filing as a single taxpayer or $155,000 or less if filing jointly. If your MAGI exceeds these limits, the deduction begins to phase out, meaning those with higher incomes may receive only a partial benefit or none at all.

How to Claim the Deduction

If you qualify, your loan servicer will send you Form 1098-E, which shows the amount of interest paid during the year. You can claim the deduction when filing your taxes by entering the amount on Schedule 1 of Form 1040.

This deduction is particularly helpful for recent graduates who are repaying student loans and looking for ways to reduce their taxable income. While it may not be as valuable as the AOTC or LLC, it can still provide meaningful savings.

If you have both education expenses and student loans, be sure to maximize your credits first and then take advantage of this deduction if eligible.

Steps to Claim Education Credits on Your Tax Return

To claim either of the education credits, follow these steps:

1. Gather Your 1098-T Form

Your school will send you Form 1098-T, which reports your tuition and other qualified education expenses.

2. Fill Out Form 8863

Use IRS Form 8863 to calculate and claim your AOTC or LLC. Attach this form to your 1040 tax return.

3. File Your Taxes

Once you’ve completed Form 8863, file your taxes using tax software like TurboTax or H&R Block, or consult a our tax experts to make sure you’re getting the maximum benefit.

How You Can Get the Most Out of Your Education Credits

Whether you’re a college student, a parent paying for tuition, or even someone taking courses to boost your career, we’ll help you figure out exactly which education credits you qualify for and how to claim them. A lot of people either miss out on tax credits or don’t realize they can get money back just because they’re unsure of the rules. Our team at SK Financial CPA makes the whole process easier by walking you through your tax return, making sure you include every eligible expense like tuition, books, and required materials so you don’t leave money on the table.

To make tax preparation more accessible, we offer affordable pricing, with individual tax filing services starting at $250, ensuring that students and families get expert guidance without overspending. Additionally, we’re currently running a referral program, where clients who refer a friend or family member receive a discount on their tax services, helping them keep even more of their hard-earned money.

Common Mistakes to Avoid When claiming education credits

Many taxpayers make errors that reduce their savings. Understanding these common mistakes can help you avoid losing out on valuable tax benefits.

Claiming Both Education Credits for the Same Student

A common error is attempting to claim both the AOTC and LLC for the same student in the same tax year. The IRS does not allow this you must choose one credit per student per year. If multiple students in your household qualify, you can use different credits for different individuals, but not both for the same person.

Exceeding the Income Limit

Each credit has income restrictions, and if your Modified Adjusted Gross Income (MAGI) is too high, you may not qualify. The AOTC and LLC begin to phase out at $80,000 for single filers and $160,000 for joint filers, with the credit fully disappearing at $90,000 and $180,000, respectively. If you’re close to the limit, careful tax planning may help you remain eligible.

Forgetting to Include Eligible Expenses

Many taxpayers forget that the AOTC and LLC cover more than just tuition. Books, supplies, and equipment required for coursework also qualify, even if they were not purchased directly from the school. Failing to include these expenses could reduce your total credit amount and result in lost savings.

Not Claiming the Refundable Portion of the AOTC

Unlike the LLC, the AOTC is partially refundable, meaning even if you owe zero tax, you could still receive up to $1,000 as a refund. Many taxpayers fail to claim this refund due to incorrect filing or misunderstanding how refundable credits work. If you qualify for the AOTC, make sure to claim the full amount, including the refundable portion.

Final Thoughts

Education credits are a great way to save money on your taxes and make higher education more affordable. Whether you’re an undergraduate student or a graduate student continuing your education, the AOTC and LLC can significantly reduce your tax burden.

Make sure you keep all your receipts and documentation for tuition, books, and supplies, check your eligibility, and file the right forms to maximize your savings. Don’t leave free money on the table claim your education credits today!

If you’re unsure about which credit applies to you, it’s always a good idea to consult with a tax professional who can guide you through the process.

FAQs

1. Can I claim education credits if I receive a scholarship or grant?

Yes, you can still qualify for education tax credits if you receive a scholarship or grant. However, you can only claim credits for expenses not covered by the scholarship or grant. If your tuition and fees exceed the amount of financial aid you received, you may be able to claim a credit for the difference.

2. What if I pay for college expenses using a 529 plan? Can I still claim an education credit?

You may be able to claim an education credit even if you use a 529 plan, but you can’t “double dip.” This means you cannot use the same expenses to claim both a 529 plan withdrawal (tax-free) and an education credit. If you have additional education expenses beyond what your 529 plan covers, you may still be eligible for an education credit on those extra costs.

3. Can I claim an education credit for courses taken at a foreign university?

It depends on whether the foreign university is eligible under U.S. tax law. To qualify for education tax credits, the institution must be recognized as an eligible educational institution by the U.S. Department of Education. Many international universities qualify, but it's best to check with the Federal Student Aid (FSA) office or the school's financial aid department.

4. What happens if I mistakenly claim an education credit I’m not eligible for?

If you mistakenly claim an education credit that you’re not eligible for, the IRS may disallow the credit, which could result in owing additional taxes, interest, and possible penalties. If the IRS determines that you intentionally filed a false claim, you may be barred from claiming the credit for up to 10 years. Always double-check eligibility requirements before filing.

5. If I am claimed as a dependent on my parents’ tax return, can I still claim education credits?

No, if your parents claim you as a dependent, they are the ones eligible to claim the education credit on their tax return not you. However, if you are not claimed as a dependent and you pay for your own education expenses, you may be able to claim the credit yourself. It’s important to coordinate with your parents to avoid duplicate claims, as only one person can claim the credit per student.

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