Education Tax Credits: Credits to Offset the Cost of Higher Education

The costs of higher education can be staggering.  Thankfully, there are two tax credits available to help families offset the cost of higher education for either your own educational needs or that of your dependents.  Tax credits reduce the amount of income tax you are required to pay, which is typically better than a tax deduction which only reduces the amount of your income subject to tax.

You qualify for the tax credits if you are paying tuition and fees for yourself, spouse or dependent(s).  Only one person may claim the credit for a student, so your son or daughter cannot claim the credit if you claim them as a dependent on your tax return and claim the credit on your return.

You are only eligible to claim one of the tax credits per tax year, per student – not both.  If you have more than one student eligible for the tax credits in a single tax year, however, you can decide which tax credit to claim for each student, each year.  In other words, you don’t have to file for the same tax credit for all students in the household.

American Opportunity Tax Credit

The American Opportunity Tax Credit is available during the first four years of higher education.  The amount of the credit is up to $2,500 per eligible student, per tax year with 40% of the credit being refundable – which means even if you do not owe taxes you can receive up to $1,000 through this tax credit.

Eligible students are pursuing undergraduate degrees, enrolled at least half time for a minimum of one academic period.  Expenses which are eligible include tuition, fees, supplies, books, and required equipment for courses.

Single filing taxpayers earning less than $80,000 per year, or married filers earning $160,000 per year are eligible for the full American Opportunity Tax Credit.

Lifetime Learning Tax Credit

The Lifetime Learning Credit is available for all years of post-secondary education and for all courses taken to improve or obtain job skills.  Students do not need to be pursuing a degree to qualify for this credit.  The credit is up to $2,000 per eligible student per tax year.  The maximum amount of Lifetime Learning Tax Credit you can claim is limited to the amount of taxes you owe on your return.

Eligible expenses under the Lifetime Learning Tax Credit include tuition, fees, books, supplies and required equipment.  Taxpayers earning less than $60,000 filing single; or under $120,000 for married couples with a joint tax return are eligible for the full amount of the credit.

Because you can only claim one of the tax credits per student each year, it is beneficial to see which of the tax credits will save you the most money when deciding which one to claim.  For more information about either of these tax credits designed to make the cost of higher education more affordable, see IRS Publication 970.