If you're one of the many taxpayers who are pursuing a college degree or other post secondary degree, or if you have a child or spouse doing so, there are two credits that could save you a bundle: the American Opportunity Tax Credit and the Lifetime Learning Credit.
Tax deductions versus tax creditsTax deductions and tax credits both allow us to save money on our income taxes, but tax credits, such as the two above, are the better of the two: While a tax deduction reduces the amount of income you pay taxes on, a tax credit is a dollar-for-dollar deduction from the amount of taxes you owe. The really good news is that if tax credits reduce your tax owed to less than zero, and you are claiming the American Opportunity Tax credit, you may even get a tax refund; this does not apply to the Lifetime Learning Credit.
Who can claim these expenses? You may qualify for one or bothof these credits if you paid qualified education expenses for yourself, your spouse, or your dependent. However, you can't claim both credits for the same student in the same year. However, you could possibly claim the American Opportunity Tax Credit for one or more students in your family and then claim the Lifetime Learning Credit for up to $10,000 of qualified expenses for other students in your family. It is worthwhile to compare the two to see which works best in each scenario.
You must also be a U.S. citizen or resident alien for the entire tax year that you're claiming for, and if you're married, your spouse needs to meet the same requirements. You cannot claim these credits if you're married filing separately. If you are claiming for a child, they must be listed as a dependent on your tax return.
What are qualified expenses?Expenses covered by both credits include tuition and mandatory enrollment fees. The American Opportunity Tax Credit also covers the cost of books and course materials. Items that do not qualify for the either credit include, but are not limited to: room and board, student health insurance and medical expenses, transportation, athletics, and other fees that are not a condition of enrollment in the educational program. For example, if a school requires students to have a laptop computer as a condition of their enrollment, then that would be deemed a qualified expense. For a more detailed list see this IRS list of qualifying expenses.
Which educational institutions are eligible?In order to claim one of these credits, the student must attend an eligible institution -- that is, any college, university, vocational school, or other postsecondary educational institution deemed eligible to participate in a student aid program. This includes most accredited public, nonprofit, and for-profit postsecondary institutions. If you're unsure whether your school is eligible, you can ask the institution or check to see if it's on the Federal Student Aid School Code List.
A closer look at the limits:
*A phaseout is the gradual reduction of ataxcredit as the taxpayer approaches the income limit to qualify for that credit.
You can use IRS Form 8863 to figure out your potential education credits for both of these programs. If you qualify, simply enter the credit information in the section of your 1040 form titled Tax and Credits. The IRS Form 8863 can also help you determine if any of the educational expenses you had during the year that do not qualify for either of the tax credits may instead qualify as tax deductions.
If you qualify for either of these credits, then you owe it to yourself to claim one of them. One of the cardinal rules of personal finance is to never say no to free money.
The article Could an Educational Tax Credit Save You $2,500 This Year? originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.