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Two tax credits, the American opportunity credit and the lifetime learning credit, can help students and their parents defray education expenses. As the names indicate, these educational assistance options are credits rather than deductions, so they take a bigger bite out of your tax bill.
A deduction reduces your taxable income, which can, but is not guaranteed to, reduce your final tax bill. A credit, however, is subtracted directly from the final tax you owe.
American Opportunity Credit
The American opportunity credit was created as part of the 2009 stimulus bill. It is an enhanced version of the previous Hope educational assistance credit.
The American opportunity credit is worth $2,500, whereas claiming the Hope got you at most $1,800. Even better, up to 40% of the American opportunity credit is refundable, meaning you could get up to $1,000 back as a refund even if you don't owe any taxes.
There are income limits on who can claim the American opportunity credit, but they are greater than were those associated with the Hope credit. Now you can earn up to $80,000 if you're a single filer, twice that if married filing jointly, and still claim the full American opportunity credit. A reduced credit amount is available for single filers who earn up to $90,000 and joint filers making up to $180,000.
While the American opportunity credit is improved, it still has some restrictions. It can only be used to claim expenses incurred during the first four years of college. It also is temporary. Unless Congress continues it, the credit will expire at the end of 2012.
Lifetime Learning Credit
If your educational costs are beyond four undergraduate years of college, you'll want to look at the Lifetime learning credit. It lives up to its name. It can be used for undergraduate, graduate and professional degree courses for anyone.
This means a qualifying course you took to improve your current job skills or get new work could be partially paid for by the tax credit.
If you meet Internal Revenue Service guidelines, you can count $10,000 of your education expenses. If you have a child also going to college and that child has eligible expenses, you can count those toward the $10,000 total, too, since the credit can be applied to all qualified education expenses in a taxpayer's family.
These costs, however, don't translate directly to your tax break. Rather, you get to claim up to 20% of your eligible lifetime learning expenses, which could net you a maximum $2,000 credit.
You can claim the lifetime learning credit in full if your modified adjusted gross income is less than $50,000 and you are a single filer or if it is $100,000 and you file a joint return with your spouse. The credit amount will be reduced if you make between $50,000 and $60,000 as a single taxpayer or between $100,000 and $120,000 and are a married couple filing jointly.
To qualify for the credits, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, he or she cannot file for the credit.
You also cannot claim credits for a student named as a dependent on your tax return if you already used the tuition and fees adjustment for that same student. But you can claim the credits even if you received a distribution from a Coverdell education savings account or a qualified tuition program. Just make sure you don't use Coverdell or tuition account money to pay for the expenses you use to claim an education credit.
If a student meets the requirements for the American opportunity credit and the lifetime learning credit, you must pick which to claim. You cannot take both for the same student in the same year.
However, if you have multiple kids in college, you can choose to take the American opportunity credit and the lifetime learning credit on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for your daughter and the lifetime learning credit for your son on the same tax return.