Education Tax Credits: How Students & Parents Can Save Money (2025 Guide)

Introduction

Higher education can be expensive, but the IRS offers tax credits that help students and parents reduce their tax burden. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) provide direct tax savings for qualifying education expenses. This guide explains how these credits work, who qualifies, and how to claim them on your 2025 tax return.

American Opportunity Tax Credit (AOTC) (IRC §25A(b))

The AOTC is a tax credit for undergraduate students in their first four years of college.

Key Benefits:

• Credit of up to $2,500 per student per year
• 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000
• 40% of the credit is refundable (up to $1,000)
• Available for four tax years per student

Who Qualifies?

• The student must be enrolled at least half-time in a degree or certificate program.
• The credit is phased out for higher incomes:
  • Single filers: Phases out at $80,000–$90,000 AGI
  • Married filing jointly: Phases out at $160,000–$180,000 AGI

Example:

Emily, a full-time college student, paid $4,500 in tuition. She qualifies for:

• 100% of the first $2,000 = $2,000
• 25% of the next $2,000 = $500
• Total credit = $2,500, reducing her tax liability directly.

Lifetime Learning Credit (LLC) (IRC §25A(c))

The LLC helps students at any education level, including graduate school and job training courses.

Key Benefits:

• Credit of up to $2,000 per tax return
• Covers 20% of the first $10,000 of qualified expenses
• No limit on the number of years you can claim it
• Non-refundable (only reduces tax liability but won’t generate a refund)

Who Qualifies?

• The student must be enrolled in at least one course at an eligible institution.
• Income limits for 2025:
  • Single filers: Phases out at $80,000–$90,000 AGI
  • Married filing jointly: Phases out at $160,000–$180,000 AGI

Example:

Mark, a part-time graduate student, paid $5,000 in tuition.

• 20% of $5,000 = $1,000 credit applied to his tax liability.

Qualified Education Expenses (IRC §25A(f))

Only qualified expenses count toward education tax credits.

Eligible Expenses:

• Tuition and mandatory fees
• Required course materials (books, supplies, and equipment if needed for enrollment)
• Certain student activity fees

Non-Eligible Expenses:

• Room and board
• Transportation costs
• Health insurance
• Personal expenses (laptops, unless required by the school)

Can Parents and Students Both Claim the Credit?

• If the student is a dependent, the parent claims the credit on their return.
• If the student is independent, they claim the credit themselves.
• Only one credit per student per year (you cannot claim both AOTC and LLC for the same student).

How to Claim Education Tax Credits

Step 1: Gather Documents

• Form 1098-T (Tuition Statement) from the school
• Receipts for textbooks and qualifying expenses

Step 2: Choose the Right Credit

• AOTC if the student is an undergraduate and meets eligibility criteria.
• LLC for graduate students, professional development, or part-time students.

Step 3: Complete IRS Forms

• Use Form 8863 (Education Credits) to claim AOTC or LLC.
• Enter the credit amount on Schedule 3 (Form 1040).

Step 4: File Your Tax Return

• If filing electronically, tax software will help calculate the credits.
• If unsure, consult a tax professional.

Conclusion

Education tax credits can significantly reduce tax liability for students and parents. Choosing the right credit and keeping accurate records ensures you receive the maximum benefit.

Need help? Schedule a consultation with Anshul Goyal, CPA EA FCA to make sure you claim the right education tax credits.

Disclaimer

This article is for informational purposes only and should not be considered tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional, such as Anshul Goyal, CPA EA FCA, before making any tax-related decisions.

FAQs

1. What is the difference between AOTC and LLC?

• AOTC is for undergraduates and is partially refundable.
• LLC applies to all education levels and is non-refundable.

2. Can I claim both AOTC and LLC in the same year?
No, you can only claim one credit per student per year.

3. Can parents and students both claim the credit?
No, only one taxpayer per student can claim the credit. If the student is a dependent, the parent claims the credit.

4. Can I claim a credit if I received a scholarship?
Only expenses paid out-of-pocket (not covered by scholarships or grants) qualify.

5. What form do I need to claim education credits?
Use Form 8863 (Education Credits) and attach it to your Form 1040.