Education Tax Benefits Can Help Pay for Higher Education
Two key federal tax benefits can help you offset the costs of higher education for yourself, your spouse or your dependents. They are the American Opportunity Credit and the Lifetime Learning Credit.
Because these benefits are tax credits, they are generally better than tax deductions because they reduce your taxes directly dollar for dollar, whereas as deductions only reduce your taxable income.
To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by either the parent or the student, but not both. If the student is claimed as a dependent, the student cannot file for the credit.
For each student, you may claim only one of the credits in a single tax year. For example, you cannot claim the American Opportunity Credit to pay for part of your daughter's tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.
However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. In other words, you can claim the American Opportunity Credit for your freshman daughter while at the same time claiming the Lifetime Learning Credit for your own graduate school tuition.
Listed here is some key information for you to know about these valuable education credits:
1. The American Opportunity Credit
- The credit can be up to $2,500 per eligible student.
- It is available only for the first four years of postsecondary education.
- Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000 back, even if you owe no taxes or are not even required to file a return.
- The student must be pursuing an undergraduate degree or other recognized educational credential.
- The student must be enrolled at least half time for at least one academic period.
- Qualified expenses include tuition and fees, coursed related books, supplies and equipment.
- The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $80,000 or $160,000 for married couples filing a joint return.
2. Lifetime Learning Credit
- The credit can be up to $2,000 per eligible student.
- It is available for all years of postsecondary education and for courses to acquire or improve job skills.
- The maximum credited is limited to the amount of tax you must pay on your return. Unlike the American Opportunity Credit, it is not refundable.
- The student does not need to be pursuing a degree or other recognized education credential.
- Qualified expenses include tuition and fees, course related books, supplies and equipment.
- The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $60,000 or $120,000 for married couples filing a joint return.
Even if you don't qualify for these education credits, you may still qualify for the tuition and fees deduction, which can reduce the amount of your income subject to tax by up to $4,000.
However, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.
For more information about the various education tax benefits, you may want to take a look at IRS Publication 970, Tax Benefits for Education, available online at www.irs.gov.
