Understanding Education Tax Credits: A Smart Way to Lower Your Taxes

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Sep 8
2 min read

When it comes to saving money on your taxes, education tax credits can be an incredible benefit for families and students. These credits directly reduce the amount of tax you owe, dollar-for-dollar, and can make higher education more affordable. At Shifflett & Philips CPA, we want to help you understand the two primary education tax credits available—the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC)—and how you can maximize their value.

Why Education Tax Credits Matter

Unlike deductions, which reduce your taxable income, credits reduce your tax bill directly. For example, a $2,000 credit reduces your tax liability by $2,000. With the rising cost of higher education, education credits can save families thousands of dollars every year.

The American Opportunity Tax Credit (AOTC)

Credit Amount: Up to $2,500 per eligible student each year.
- 100% of the first $2,000 of qualified education expenses.
- 25% of the next $2,000.
Who Qualifies: Available for the first four years of higher education (undergraduate only).
Refundable Portion: Up to $1,000 of the credit is refundable, meaning you could get money back even if you owe no tax.
Income Phase-Outs (2025):
- Single filers: Begins phasing out at $80,000, completely phased out at $90,000.
- Married filing jointly: Phases out between $160,000–$180,000.

The Lifetime Learning Credit (LLC)

Credit Amount: Up to $2,000 per tax return (not per student).
- Equals 20% of the first $10,000 of qualified education expenses.
Who Qualifies: Available for all years of higher education and for courses to acquire or improve job skills (including graduate and professional education).
Refundable Portion: This credit is nonrefundable—it can reduce your tax bill to zero, but you won’t receive a refund for any excess.
Income Phase-Outs (2025):
- Single filers: Begins phasing out at $80,000, completely phased out at $90,000.
- Married filing jointly: Phases out between $160,000–$180,000.

Key Planning Tips

Choose wisely: You can’t claim both credits for the same student in the same year. AOTC often provides the greater benefit for undergraduates, while LLC is ideal for graduate students or continuing education.
Track qualified expenses carefully: This includes tuition, fees, and course materials required for enrollment. Room and board do not qualify.
Coordinate with 529 plans: If you’re using a 529 plan, be sure you’re not “double-dipping” by using the same expenses for both tax-free 529 withdrawals and education credits.
Plan income levels: If you’re close to the phase-out thresholds, consider strategies such as retirement contributions or timing income to stay under the limits.

Final Thoughts

Education tax credits are one of the most valuable ways to reduce your tax liability while investing in your or your child’s future. Whether it’s the AOTC for undergraduates or the LLC for lifelong learning, planning ahead can ensure you maximize the benefits.

At Shifflett & Philips CPA, we work with clients to identify every available tax advantage. If you or your dependents are pursuing higher education, reach out to us so we can help you determine the best strategy.