A Guide to Understanding Education Tax Credits
UMD Accounting Lecturer Explains How Smart Choices Can Save Filers Money
From left to right: TerpTax volunteers Ryan Sprague ’26, accounting major from Rockville, Md., and Maisie Wartzack ’25, accounting and finance dual degree major from Silver Spring, Md., assist first-time participant Hongjie Ke Ph.D. ’24 with filing taxes. TerpTax is a student-run tax assistance program for students and community members making less than $65,000.
Photo by Riley N. Sims
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 Samuel Handwerger, a CPA and lecturer at the University of Maryland’s Robert H. Smith School of Business.
Tax credits and deductions work very differently, said Handwerger, who serves as the faculty adviser of the UMD-affiliated tax-preparation service TerpTax. 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 said.
For example, Handwerger said, 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.
As the tax season kicks into high gear, Handwerger explained the primary education credits and how a strategic approach to them could save tax filers thousands of dollars, making education more affordable in the long run.
- 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 be claimed only for four years of college education. 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.
Qualified Expenses
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. 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
“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,” Handwerger said. “While you won't get the refundable portion, you could still significantly reduce any tax liability you may have.”
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