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News — For savings-focused students and parents, understanding education tax credits is critical at tax time. The key is knowing the difference between credits and deductions and understanding who can claim these benefits, says accounting lecturer and faculty advisor , CPA, at the University of Maryland’s Robert H. Smith School of Business.

Credits vs. Deductions: A Critical Distinction

Fundamentally, tax credits and deductions work very differently, says Handwerger. A tax deduction reduces your taxable income, while a tax credit directly reduces your tax bill, dollar for dollar. “This makes credits generally more valuable than deductions,” he says.

“For example, if you're in the 22% tax bracket, a $1,000 deduction would save you $220 in taxes. However, a $1,000 tax credit would save you the full $1,000, regardless of your tax bracket. This is why education credits can be particularly valuable.”

The Two Main Credits

Handwerger summarizes the primary education credits:

• American Opportunity Credit (AOC) is worth up to $2,500 per year and is available for undergraduate students enrolled at least half-time. It can only be claimed for four years of college education. One particularly valuable feature is that up to $1,000 of this credit can be refundable, meaning you might get money back even if you don't owe taxes.
• Lifetime Learning Credit (LLC) is worth up to $2,000 per year with no limit on the number of years it can be claimed. It's particularly useful for graduate students and those taking professional development courses, as there's no requirement to be pursuing a degree.

Important Note for Students, Parents

Handwerger says many people miss a “crucial” point: “If parents are ineligible to claim their child as a dependent because of their income being too high, or if the credit would save more taxes if claimed by the child, then the parents have the option to not claim the child as a dependent for the purposes of this credit and the student can claim the education credit on their own return, as if they paid the eligible costs,” he says. “However, there's an important caveat in this scenario: while the student can use the credit to reduce their tax liability, they cannot receive the refundable portion of the American Opportunity Credit in this situation.”

Qualified Expenses

Both AOC and LLC credits can be used for tuition and required enrollment fees. The American Opportunity Credit also covers required course materials, while the Lifetime Learning Credit is more restrictive and only applies to tuition and required enrollment fees.

Income Limitations

Both credits phase out at higher income levels, Handwerger notes. For 2024, the limits are $180,000 for married filing jointly and $90,000 for other filing statuses. Additionally, those filing as married filing separately cannot claim either credit.

Key Takeaway

These are credits, not deductions, making them particularly valuable for reducing your tax bill, Handwerger says. “If you're a student whose parents don't qualify for the credit due to income limitations, discuss with them the possibility of not claiming you as a dependent so you can claim the credit yourself. While you won't get the refundable portion, you could still significantly reduce any tax liability you may have.”

Handwerger reasserts that a strategic approach to education credits could save tax filers thousands of dollars, making education more affordable in the long run.

A nonprofit organization affiliated with UMD under Handwerger’s guidance, TerpTax provides free tax preparation services for low to mid-income individuals in the University of Maryland, College Park community, according to VITA/TCE guidelines. The organization is taking appointments through April 14, 2025. Read more at the.