Back-to-School, Back to Savings: Maximize Your 2025 Education Tax Breaks
- David Peters
- Aug 6
- 3 min read
If you or your child is returning to school this fall, there are several education-related tax credits and strategies that could help you save significantly on your taxes.
American Opportunity Tax Credit (AOTC) – Up to $2,500 Per Eligible Student
Offers up to $2,500 per student for qualified higher education expenses: 100% of the first $2,000 and 25% of the next $2,000.
Up to $1,000 is refundable, meaning it can be received even if your tax liability drops to zero.
Available only during the first four years of postsecondary studies, for students enrolled at least half‑time, pursuing a degree or recognized credential.
Not available if a student has a felony drug conviction or has claimed AOTC (or the former Hope Credit) for more than four years.
Income phase‑out applies: full credit for singles with modified AGI up to $80,000, and joint filers up to $160,000; phases out completely upon reaching $90,000 for singles and $180,000 for joint filers.
Lifetime Learning Credit (LLC) – Up to $2,000 Per Return
Provides 20% of up to $10,000 in qualified education expenses, capped at $2,000 per tax return, regardless of number of students.
Covers undergraduate, graduate, professional courses, and continuing education or job skills training—even part‑time enrollment. No degree required.
The LLC is non‑refundable, so it can reduce your tax to zero but won’t generate a refund beyond your tax liability.
Income phase‑out applies: full credit for singles with modified AGI up to $80,000, and joint filers up to $160,000; phases out completely upon reaching $90,000 for singles and $180,000 for joint filers.
529 Plan Withdrawals: Tax‑Free for Many Education Expenses
Withdrawals from a 529 college savings plan are tax‑free when used for qualified education expenses, including tuition, required fees, books, supplies, and even computers, software, and Internet access—so long as they’re used primarily by the student and are required for enrollment or attendance.
The rules were expanded by the PATH Act of 2015 and are fully implemented; hardware and related services now qualify.
Planning Strategies to Maximize Savings
Select the right credit:
For eligible undergraduates in early years, AOTC typically yields more savings.
For graduate students, continuing education, or part‑time programs, LLC may be the better fit (or the only one available).
Track qualifying expenses carefully:
Qualifying costs include tuition, required enrollment fees, books, items required by the course (e.g. lab supplies, software).
Expenses like room and board, transportation, health insurance, or optional fees do not qualify. AOTC and LLC cannot be claimed on the same expenses.
Get your Form 1098‑T:
You’ll receive this from the school reporting tuition and fees paid
Watch your income limits:
AOTC income phase‑outs: $80,000–$90,000 (single), $160,000–$180,000 (married filing jointly).
LLC phase‑outs are the same.
Coordinate between credits and 529 use:
Do not apply the same expense for both a credit and a 529 plan withdrawal.
It may be beneficial to use 529 funds for required materials like computers or course software that may not count toward credits.
Why These Benefits Matter:
For the 2025 tax year, millions of taxpayers will claim education credits and benefit significantly. These credits reduce tax liability dollar‑for‑dollar, and with AOTC, even yield a refund.
The expanded 529 flexibility means parents can now use these funds for broader educational tools and credentials. (It will expand even more in 2026!)
Quick Comparison
Tax Benefit | Maximum Value | Eligibility Conditions | Refundable? |
American Opportunity Credit | Up to $2,500 per student | Undergraduate, first 4 years, half‑time enrollment | Yes (up to $1,000 refund) |
Lifetime Learning Credit | Up to $2,000 per return | Grad students, continuing education, job‑skill courses | No |
529 Plan Withdrawals | Tax‑free up to limits | Computers, required materials, tuition, voc. training |
Final Thoughts from David Peters
Here at Peters Tax Preparation & Consulting, PC we emphasize the importance of smart, proactive tax planning for educational expenses. By choosing the right credit and coordinating your expenses, you can preserve your resources and reduce your tax burden.
Start collecting records now—forms, receipts, course requirements—so you’re ready ahead of tax season and can maximize these IRS education benefits.
We help families throughout the United States choose the best strategy, complete Form 8863, evaluate 529 use, and ensure compliance with IRS rules. Contact us today to get personalized guidance tailored to your educational and financial situation.
Back-to-school season is an ideal time to review and plan:
Claim the AOTC if your student qualifies
Use the LLC when it's better suited
Leverage 529 withdrawals wisely
Keep all documentation in order
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