Available Education Tax Credits You Can Claim

For students and their parents, there are two tax credits that can help with the costs of higher education. The American opportunity tax credit is a partially refundable tax credit that you can receive for qualified educational spending. You can receive a non-refundable tax credit based on tuition and fees for higher education. Depending on your status you may be eligible for one or both. Here’s what you need to know. 

A financial advisor can help you put a financial plan together to save up for your family’s education needs.

What Are Educational Tax Credits?

An education tax credit is a tax break that you can get based on educational spending. For every dollar in qualified spending, you can receive up to a dollar off your final tax bill. Don’t call it a tax deduction, however. Deductions reduce your taxable income, which is what informs your tax bill based on your tax bracket. Credits apply to the bill, not the calculation.

These educational tax credits cover post-high school education, such as university and vocational schools, not K-12 spending.

As a student, you can claim educational tax credits unless someone claims you as a dependent on their taxes. If that’s the case, then your parent or guardian may be able to claim any eligible educational tax credits.

The IRS offers two educational tax credits. The American opportunity tax credit (the AOTC) and the lifetime learning credit (the LLC).

American Opportunity Tax Credit

The American opportunity tax credit is a partially refundable tax credit for qualified education expenses. Eligible taxpayers can receive an annual credit of up to $2,500. If the full credit brings your tax bill below zero, you can potentially get a refund. However, the refund is only worth up to 40% of your remaining credit or a maximum of  $1,000. For example, say that your tax bill is zero and you have an AOTC worth $1,200. You could receive a $480 refund ($1,200 x 0.4). ¹

That American opportunity tax credit applies to 100% of the first $2,000 in qualified spending. Then, you can claim an additional 25% of any additional spending up to $2,000. For example, say that you spend $3,000 on books and equipment. You could claim $2,250 under the AOTC (1.0 x $2,000 + 0.25 x $1,000).  

You can claim the AOTC for qualified educational expenses. The IRS defines this as money that you pay for any expenses required for enrollment or attendance. For the purposes of this tax credit, you do not have to pay these expenses directly to the institution. However, they must meet the standard of required spending. For example, required textbooks purchased from an off-campus bookstore are claimable expenses under this credit. You can also claims things like tuition, fees, supplies, and equipment.

You (or your dependent) must be enrolled in a degree- or credential-granting program at a qualified educational institution. This enrollment must occur at least half the time during the tax year for which you are claiming the credit. And you can only claim it for up to four tax years (even if the student is in school longer). They do not have to be consecutive. Only students still in their first four years of higher education are eligible. 

Finally, your modified gross adjusted income must be no more than $80,000/$160,000 single/married filing jointly. You can receive a partial credit if your MAGI is up to $90,000/$180,000 single/married filing jointly. You cannot claim this credit if your MAGI exceeds the $90,000/$180,000 threshold.

Lifetime Learning Tax Credit

The lifetime learning credit (the LLC) is a nonrefundable tax credit worth up to $2,000. If your tax bill hits below zero you cannot receive any money back from this credit. 

You can only claim the lifetime learning tax credit for tuition or other required enrollment fees. It does not apply to other costs of attendance such as books or equipment. However, unlike with the AOTC, the LLC does not require enrollment in a degree-seeking program. You must be taking courses at a qualified educational institution, which can include universities and vocational programs. You must also show enrollment in one or more courses for the year in which you claim the tax credit. However you do not need to be pursuing a formal credential.

You can claim the LLC for the 20% of the first $10,000 you spend, up to a maximum of $2,000, on your eligible tuition and fees. You can also claim it any number of times. This credit does not fall off after a certain number of years. ²

The lifetime learning tax credit has the same income cutoffs as the American opportunity tax credit. You can claim the full credit up to an MAGI of $80,000/$160,000 single/married filing jointly. You can receive a partial credit up to $90,000/$180,000 single/married filing jointly, after which you cannot claim this credit.

Additional Benefits and Deductions

Beyond tax credits, you can find a network of resources to help you prepare and pay for a college education. These options include:

529 Savings Plans

A 529 plan is a tax-advantaged account that you can use to save for the costs of education. These are operated at a state-level, so your options will vary based on your specific jurisdiction. While contributions to a 529 plan are not tax deductible for federal tax purposes, the funds in these plans can typically grow either tax-free or tax-deferred. Depending on the nature of your plan and your spending, you might also be able to make withdrawals tax-free. 

A 529 plan is typically either structured as a general educational savings fund or as a prepaid tuition fund.  

Student Loan Interest Deductions

Most people who hold student loans can take advantage of the student loan interest deduction. This is an above-the-line tax deduction that you can take for up to $2,500 worth of student loan interest payments each year. ³

State-Level Deductions

Many states offer deductions to your state taxes based on qualified education spending. For example, in Massachusetts you may be able to take a tax deduction based on tuition payments that you make to a qualified two- or four-year college or university. ⁴ Not every state offers education deductions, but if you live in an income tax state make sure to look this up.

Education Savings Bonds

The education savings bond program allows you to collect interest on U.S. savings bonds tax-free when you spend that money on qualified educational expenses. This isn’t a blanket grant, it has both income and spending requirements, but it can make Treasury investments a tax-advantaged way to save for college.

Choosing Between Credits and Maximizing Your Benefit

Start with the student’s situation rather than the size of the credit. The American Opportunity Tax Credit generally applies during the first four years of higher education, while the Lifetime Learning Credit can cover later undergraduate years, graduate study and qualifying courses taken to develop job skills. The expenses that qualify also differ, so tuition is not the only factor when comparing them.

Your other education funding can change the calculation. Money used to support a credit generally cannot also serve as the basis for another tax benefit. This becomes especially important when combining education credits with tax-free 529 plan withdrawals because expenses need to be allocated carefully between them.

Scholarships and grants can further reduce the costs available for a credit when that assistance is tax-free and pays qualified education expenses. Tracking what you paid, what financial aid covered and how 529 funds were used can prevent you from assigning the same expense twice.

Household income can also limit the benefit. Taxpayers approaching the applicable income phaseout range may receive a smaller credit or lose eligibility altogether. When income varies from year to year, the timing of bonuses, business income, or capital gains could therefore affect the available tax break.

Having multiple students in college creates another planning opportunity. A family may qualify for the AOTC for more than one eligible student, whereas the Lifetime Learning Credit has a limit that applies to the return. Calculating each student separately can show which combination produces the greatest overall benefit.

Keep tuition statements, receipts for eligible course materials, scholarship records, and documentation of 529 distributions. Those records support the amounts reported on your return and make it easier to separate expenses among the tax benefits you claim.

How Education Credits Affect Your Tax Refund

An education credit can lower the federal income tax you owe, but whether it increases your refund depends on which credit you claim. The American Opportunity Tax Credit is partially refundable, while the Lifetime Learning Credit is nonrefundable.

With the AOTC, up to 40% of the credit may be refundable, subject to a $1,000 limit. This means an eligible taxpayer could receive part of the benefit even after their federal income tax liability has been reduced to zero.

The LLC works differently because it can only reduce your tax liability. If you qualify for a $2,000 LLC but owe $1,200 in federal income tax, the credit can reduce that liability to zero, but the remaining $800 does not become a refund.

Tax withholding and estimated payments also affect the amount you receive when you file. A credit reduces the tax calculated on your return, while withholding represents money you have already paid toward that liability. As a result, claiming an education credit could increase a refund of taxes previously withheld.

The distinction matters when comparing the two credits. A larger calculated credit does not always produce the same financial result if part of it cannot be used against your tax liability. Looking at both the credit amount and your federal tax bill gives you a clearer picture of the potential benefit.

Before estimating a tax return refund, calculate your federal income tax, subtract the education credit you can use and then account for withholding and other payments. For the AOTC, any refundable portion should be calculated separately because it may provide an additional benefit after your liability reaches zero.

Bottom Line

There are several tax benefits available if you pay tuition or other costs associated with higher education. On the federal front, you may be able to take advantage of the Lifetime Learning and American Opportunity tax credits, or enjoy the tax benefits of Education Savings Bonds. From there, depending on where you live, your state may offer a variety of programs and deductions.

Tuition Spending Tips

• A financial advisor can help you build a financial plan for your education needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.  
• A four-year degree is still the best investment you can make in your, or your child’s, future. It has gotten incredibly expensive, though, so let’s take a look at strategies you can use to prepare for that spending.

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