An important part of the tax-planning process is knowing what steps you can take to reduce your IRS bill year after year. And for many filers, that means capitalizing on tax credits.

A tax credit is a dollar-for-dollar reduction of your tax bill. If you owe the IRS $1,000 due to underpaying your taxes by that amount, a $500 credit will cut that liability in half.

There are two tax credits designed specifically for students -- the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Both are extremely valuable in their own right, but the LLC is actually a lot easier to qualify for. Let's explore.

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How does the LLC work?

The LLC will let you claim qualified tuition expenses if you're enrolled in undergraduate courses, graduate courses, or professional development courses. The great thing about the LLC is that you don't have to enroll in a college per se. A local course to improve your job skills, for example, could render you eligible. Also, there's no limit as to how many years you can claim the credit. With the AOTC, for example, you're limited to four years.

How much is the LLC worth?

The LLC is worth 20% of up to $10,000 in qualified education expenses, which means it maxes out at $2,000 per year. However, unlike the AOTC, which is partially refundable, the LLC is not refundable at all. This means that the most it can do is reduce your tax liability to $0. If you owe the IRS $1,000 and you qualify for the full $2,000 the LLC will pay you, you'll wipe out that $1,000 debt, but the IRS won't be obliged to send you the remaining $1,000.

Are there income limits associated with the LLC?

Many tax credits are limited to low or moderate earners, and the LLC is no exception. For the 2020 tax year (for which you'll file a tax return in 2021), you can claim the LLC in full if you're single and have a modified adjusted gross income (MAGI) of $58,000 or less. If you're married filing a joint tax return, you can claim the LLC in full with a MAGI of $116,000 or less. Beyond these thresholds, the credit begins to phase out. If you're single, it's off the table once your MAGI exceeds $68,000, or $136,000 if you're married filing jointly.

For the 2021 tax year (for which you'll file a return in 2022), these income thresholds are changing. If you're single, you'll get to claim the full LLC with a MAGI of $59,000 or less, and the credit is completely phased out if your MAGI exceeds $69,000. If you're married filing jointly, you get the full LLC with a MAGI of $119,000 or less, and beyond $139,000, you can no longer claim it.

Know your tax breaks

The LLC is only one of multiple credits the IRS makes available to tax-filers. There are also credits for low earners, parents, and those who pay for child care so they can work. Be sure to read up on tax credits in the course of your tax preparation, because that way, you'll pay the IRS as little as possible and keep more of your earnings for yourself.