Understanding the American Opportunity Tax Credit (and How It Differs from the Lifetime Learning Credit)

Paying for college can feel overwhelming, but the tax code offers a few powerful tools to help lighten the load. One of the most valuable is the American Opportunity Tax Credit (AOTC) — a credit designed to make higher education more affordable for students and families. Whether you’re filing from Green Bay or right here in De Pere, understanding how this credit works can make a meaningful difference in your tax prep this season.

The AOTC is available for students pursuing a degree or recognized credential and enrolled at least half time for at least one academic period during the tax year. The credit can be claimed for up to four tax years per eligible student, making it ideal for undergraduates. The maximum value is $2,500 per student, broken down as 100% of the first $2,000 spent on qualified education expenses and 25% of the next $2,000. Qualified expenses include tuition, fees, and course materials such as books or supplies needed for enrollment.

One of the best features of the AOTC is that it’s partially refundable. Even if you owe no tax, you can receive up to $1,000 back as a refund, which sets it apart from many other education benefits. That refund can help cover additional costs like transportation, technology, or living expenses. To claim the credit, you’ll need Form 1098-T from the educational institution and documentation showing payments made during the year.

However, not every student or family will qualify. The AOTC begins to phase out at higher income levels. For 2025, the credit is reduced once modified adjusted gross income exceeds $80,000 for single filers or $160,000 for married couples filing jointly, and it disappears completely above $90,000 and $180,000 respectively. In addition, students with felony drug convictions are not eligible. These rules can be easy to overlook during tax prep, so working with a qualified CPA can help ensure you don’t miss important details.

Now, let’s compare this to the Lifetime Learning Credit (LLC), another education-related tax benefit that often gets confused with the AOTC. The Lifetime Learning Credit offers up to $2,000 per tax return, calculated as 20% of the first $10,000 in qualified expenses. The biggest difference is flexibility: the LLC can be used for any post-secondary education, including graduate courses and professional certifications, and it can be claimed for an unlimited number of years. There’s no requirement for the student to be enrolled at least half time, making it particularly valuable for adults returning to school or taking classes to improve their skills.

On the flip side, the LLC is non-refundable, meaning it can reduce your tax liability to zero but won’t generate a refund. Its income phase-outs are also slightly different, with eligibility beginning to phase out at similar income levels but based on the tax year’s inflation-adjusted thresholds. Because you can’t claim both the AOTC and the LLC for the same student in the same year, it’s important to decide which one provides the bigger benefit. Generally, undergraduate students benefit more from the AOTC, while lifelong learners or graduate students may find the LLC more useful.

Both credits require accurate recordkeeping and coordination with Form 8863 when filing your return. Many families mistakenly assume they qualify for both or overlook one altogether. By reviewing your expenses and enrollment details carefully, you can often maximize your education-related savings.

Education is one of the best investments you can make, and the tax code recognizes that. Whether you’re helping your child start college or heading back to school yourself, these credits can make the journey a little easier. At Millhouse Accounting, we help families in Green Bay and De Pere identify every opportunity available through smart, proactive planning. If you’re preparing for the upcoming filing season, now’s the perfect time to review your education expenses and see how the AOTC or Lifetime Learning Credit could reduce your tax bill. Reach out today — your future deserves the best financial start possible.