College has certainly gotten far more expensive over the past few decades, but one thing the tax system in the United States does quite well is offer breaks for money spent on education. There's the student loan interest deduction, tax-advantaged college savings accounts such as 529 Savings Plans, and more. And of course, there are the two education tax credits -- the American Opportunity Tax Credit and the Lifetime Learning Credit.

Both credits can be rather valuable if you qualify, but each one has different requirements and you can only take one in any given tax year. Here's a rundown of both tax credits, so you can determine which one you might be able to use.

Group of college students in graduation attire.

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The American Opportunity Tax Credit: Valuable, if you can qualify

Of the two education tax credits, the American Opportunity Tax Credit is the more valuable, but it's also the tougher one to qualify for.

Specifically, to be eligible for the American Opportunity Tax Credit, or AOTC, a student needs to meet these requirements:

  • They need to be pursuing a college degree, certificate, or some other credential. For example, taking a few classes for personal enrichment or for professional development generally won't qualify for the AOTC.
  • They need to be enrolled at least half-time for at least one of the academic periods during the year. Different schools have different definitions of what is considered half-time, but a fairly common definition is taking two courses during a semester.
  • They cannot have completed the first four years of post-secondary education at the start of the year. In other words, the AOTC is designed to provide a tax benefit for a standard four-year degree program. Many students take five years or more to complete their bachelor's degrees, but the AOTC can only be used for four years.

In addition, the AOTC has income limitations. The taxpayer claiming the full credit (not necessarily the student) must have modified adjusted gross income (MAGI) of $80,000 or less for a single taxpayer or $160,000 or less if filing jointly. A partial credit may be available up to MAGI of $90,000 and $180,000, respectively.

If you meet the strict qualifications, however, the AOTC is rather lucrative. It's worth 100% of the first $2,000 in qualified expenses, plus 25% of the next $2,000. In other words, if your qualified educational expenses are $4,000 or more and you qualify for the AOTC, the credit is worth $2,500 per year. Even if your tax liability is zero, up to $1,000 of the credit is refundable.

And if you pay expenses for more than one eligible student, you can take the AOTC for each one.

The Lifetime Learning Credit has far fewer limitations

The good news is that the Lifetime Learning Credit is far less restrictive. First of all, there's no degree-seeking requirement to claim the credit, nor is there any half-time enrollment requirement. In other words, even if you're just taking one class for personal enrichment, it could be eligible for the LLC.

In addition, it doesn't matter if you've completed the first four years of post-secondary education. My wife and I both used the LLC for each year of our respective master's degrees, and I used it when I obtained a graduate certificate in financial planning as well. And there's no limit to the number of years you can use the LLC -- as the name "lifetime learning" implies, you can use the credit year after year if you have qualifying expenses, which essentially means that you paid educational expenses to an eligible higher education institution.

One big downside is that the income limitation for the LLC is far more restrictive than that of the AOTC. To claim the full credit, your MAGI must be $56,000 or less (single) or $112,000 or less (joint return). A partial credit may be available if your MAGI is greater than these thresholds, but less than $66,000 or $132,000, respectively.

While it's generally easier to qualify for, the LLC isn't quite as valuable as the AOTC. It is worth a maximum of $2,000 per return (not per student) but is calculated as 20% of the first $10,000 of qualifying expenses.

As an example, a taxpayer claiming the AOTC with $4,000 in eligible expenses would get a $2,500 tax credit. On the other hand, a taxpayer claiming the LLC with $4,000 in eligible expenses would get only $800.

The bottom line on education tax credits

Both credits can be very valuable for those who qualify. If you meet the qualifications for both credits in a given tax year, the AOTC is obviously the better option, but if you don't meet the AOTC's strict requirements, the LLC can certainly help lessen the burden of higher education expenses.