Education Tax Credits: Which One Fits You?

If you paid for college, graduate school, or vocational training last year, you might qualify for an education tax credit. These credits lower your tax bill dollar-for-dollar, which is better than a deduction. But which one works for you? The answer depends on your situation. Let’s compare the two main education tax credits: the American Opportunity Tax Credit and the Lifetime Learning Credit.

What Are Education Tax Credits?

Education tax credits directly reduce the amount of tax you owe. If you owe $1,000 in taxes and claim a $2,000 credit, you’ll get $1,000 back as a refund (if the credit is refundable). The two main credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Both are available to individuals and families who pay qualified education expenses for themselves, a spouse, or a dependent.

You cannot claim both credits for the same student in the same tax year. You also cannot claim a credit if you’re married filing separately. And if someone else claims you as a dependent, you generally can’t claim the credit yourself — that person (like a parent) gets it.

American Opportunity Tax Credit (AOTC)

The AOTC is designed for students in their first four years of post-secondary education. It covers expenses paid for tuition, fees, and course materials. The maximum credit is $2,500 per eligible student. Up to 40% of the credit (so $1,000) is refundable, meaning you can get money back even if you owe no tax.

To qualify, the student must be enrolled at least half-time in a degree or certificate program. They also cannot have completed four years of higher education before the tax year. The credit phases out if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 (single) or $160,000 and $180,000 (married filing jointly).

Expenses that qualify include tuition, fees, and required books, supplies, and equipment — even if you buy them from a third party. Room and board, insurance, and transportation do not count.

Lifetime Learning Credit (LLC)

The LLC is more flexible. It covers any year of post-secondary education, including graduate school and courses to improve job skills. You can take it for an unlimited number of years. The maximum credit is $2,000 per tax return — not per student. So if you have two children in college, you still get a max of $2,000 total.

The credit is non-refundable, which means it can only reduce your tax to zero. You won’t get any leftover as a refund. The income phaseout range is lower than AOTC: $80,000 to $90,000 (single) or $160,000 to $180,000 (married filing jointly). Income limits are the same as AOTC but note that for LLC, the phaseout hasn’t been adjusted for inflation in years.

Qualified expenses for LLC are similar: tuition and fees required for enrollment. However, LLC does not cover course materials unless they are paid to the institution as part of tuition.

AOTC vs. LLC: Quick Comparison

Feature	AOTC	LLC
Max credit per year	$2,500 per student	$2,000 per return
Refundable?	Up to 40%	No
Years available	First 4 years only	Any year
Enrollment requirement	At least half-time	At least one course
Degree or certificate program?	Yes	Any eligible institution
Qualified expenses	Tuition, fees, course materials	Tuition and fees only
Income phaseout (single)	$80k–$90k	$80k–$90k
Income phaseout (MFJ)	$160k–$180k	$160k–$180k

Which One Should You Claim?

Here’s a simple way to decide. If you have a student in their first four years of college and they are enrolled at least half-time, start with the AOTC. It gives you a bigger maximum credit per student and some of it is refundable. If the same student qualifies for both, the AOTC is almost always better.

Use the LLC if the student is beyond their fourth year, is a graduate student, or is only taking one course. Also, use the LLC if you have expenses for yourself and you aren’t in a degree program — for example, a professional certification course. The LLC is great for lifelong learning.

If you have multiple students, you can claim AOTC for one and LLC for another, or AOTC for both if they each qualify. But remember, the LLC is per return, so it caps out at $2,000 total. In some cases, you might get more by claiming AOTC for two students even if one doesn’t fully use the credit.

How to Claim Education Tax Credits

You need to file IRS Form 8863 with your tax return to claim either credit. The educational institution should provide you with Form 1098-T, which shows the qualified tuition and fees you paid during the year. However, the 1098-T may not include expenses for course materials — you need to track those yourself.

Keep records of all payments made to the school. Also, save receipts for books and supplies if claiming AOTC. If you are claiming the credit for a dependent, and the dependent paid the expenses themselves, you as the taxpayer can still claim the credit if you paid the expenses on their behalf or if the dependent is your child and you claim them as a dependent. This can get tricky, so it’s wise to consult a tax professional if you’re unsure.

If you’re a small business owner or freelancer paying for your own education, remember that education credits are separate from business deductions for work-related education. For more on organizing your finances, check out our guide on setting up a bookkeeping system for your small business.

Common Mistakes to Avoid

One common mistake is claiming both credits for the same student. The IRS won’t allow it. Another mistake is claiming a credit when someone else claims you as a dependent. If you are a dependent, only the person claiming you can take the credit.

Also, don’t forget the income limits. If your income is too high, you might not qualify for any credit. The phaseout ranges are the same for both credits, but note that they don’t adjust for inflation every year. Check the latest IRS instructions for Form 8863.

Finally, only qualified expenses paid in the tax year count. If you paid for next semester in December, it counts for that year. If you used tax-free scholarships or grants to pay expenses, you cannot also claim a credit for those same expenses. This is called double-dipping and is prohibited.

What If Neither Credit Fits?

If you don’t qualify for either credit, you might still be able to deduct tuition and fees through the tuition and fees deduction. However, this deduction expired at the end of 2020 and has not been renewed for later years. Alternatively, you might consider a Coverdell Education Savings Account or 529 plan distributions, but those are not tax credits.

You can also claim a deduction for student loan interest, up to $2,500 per year, which is an adjustment to income. That’s less valuable than a credit, but it can help.

For more on tracking your finances for tax purposes, see our article on how to create a profit and loss statement for your business. Good recordkeeping makes tax time easier.

How to Determine Your Modified Adjusted Gross Income (MAGI)

Your eligibility for both credits depends on your MAGI. MAGI is your adjusted gross income (AGI) from your tax return plus certain deductions. For these credits, you calculate MAGI by taking your AGI and adding back items like foreign earned income exclusion, student loan interest deduction, and tuition and fees deduction. The IRS instructions for Form 8863 have a worksheet to help you figure it out.

If your MAGI is below the lower limit of the phaseout range, you can claim the full credit. If it’s within the range, your credit is reduced. Above the upper limit, you get nothing. For example, if you’re single with a MAGI of $85,000, your AOTC would be phased out by 50%. So instead of $2,500, you’d get $1,250 if you otherwise qualify. The phaseout works the same for LLC, but because the LLC is smaller, the reduction hits harder.

One common mistake is forgetting to include your spouse’s income if you’re married filing jointly. Both incomes count toward MAGI. If you’re filing separately, you can’t claim either credit at all. So if you’re married, filing jointly is the only way to benefit.

Special Situations: When You Might Get a Refund

The AOTC is partially refundable. That means if you owe less tax than the credit amount, the IRS sends you a refund for the difference, up to $1,000. This is a big deal for lower-income families who might not have much tax liability. For example, if you owe $500 in tax but qualify for a $2,500 AOTC, the credit first wipes out your $500 tax, then you get a $2,000 refund ($500 of that refund comes from the refundable portion, but the full $2,500 is applied – actually, the refundable part is 40% of the credit, max $1,000, but the total credit can reduce your tax to zero and refund up to $1,000). Let me clarify: The AOTC is 40% refundable up to $1,000. So if your credit is $2,500, up to $1,000 can be refunded. If your tax liability is $0, you get $1,000 back. If your tax is $300, the non-refundable part covers that $300, and you get $1,000 refund (total $1,300 benefit? Actually, the way it works: the credit first reduces tax to zero, then any remaining credit up to $1,000 is refunded. So total benefit = tax reduced to zero + up to $1,000 refund. So if tax is $300, credit $2,500: $300 used to reduce tax, $1,000 refunded, remaining $1,200 not used because it’s non-refundable and exceeds refundable limit. So you get $1,300 benefit. That’s still good.

The LLC is non-refundable, so it can only reduce your tax to zero. If you have no tax liability, you get nothing. This makes the LLC less attractive for people with little or no tax owed.

Education tax credits can save you a lot of money. Review your situation, see which credit applies, and claim it on your next return. If you’re unsure, a tax professional can help you decide. Either way, the time you spend understanding these credits is worth it.

Frequently asked questions

Can I claim both the AOTC and LLC for the same student in the same year?

No, you cannot claim both credits for the same student in the same tax year. You must choose one. Generally, the AOTC is more valuable because it’s larger and partly refundable.

What if my income is too high to qualify for education tax credits?

If your modified adjusted gross income exceeds the phaseout limits, you cannot claim either credit. The limits are $80,000-$90,000 for single filers and $160,000-$180,000 for married filing jointly. No credit is available above those limits.

Can I claim an education tax credit if I am a graduate student?

Yes, but only the Lifetime Learning Credit applies to graduate studies. The AOTC is limited to the first four years of undergraduate education. The LLC has no limit on the number of years or degree level.

Do I need a 1098-T to claim an education tax credit?

You should receive Form 1098-T from the educational institution. It shows the qualified tuition and fees paid. However, if you don’t receive one, you can still claim the credit if you have other records of payments. For AOTC, you also need receipts for course materials.

What happens if I claim an education tax credit and later receive a refund of tuition?

If you received a refund of qualified expenses after claiming the credit, you may need to recalculate your credit. You generally must subtract the refund from the expenses you used to claim the credit. This could reduce your credit and require an amended return.