Two Tax Credits to Help Pay Higher Education Costs

There are two federal tax credits available to help taxpayers offset the cost of higher education for themselves and their dependents.  These are the American Opportunity Credit and the Lifetime Learning Credit.

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To qualify for either credit, the taxpayer must pay postsecondary tuition and fees for themselves, a spouse, or a dependent.  The credit may be claimed by the parent or the student (if the student is a dependent), but not by both.  If the parent claims the student as a dependent on their tax return, the student cannot file for the credit.

For each dependent student, a taxpayer can choose to claim only one of the credits in a single tax year.  For example, a parent cannot claim the American Opportunity Credit to pay for part of their daughter’s college tuition and then claim the Lifetime Learning Credit for $2,000 more of her educational costs.

However, if a parent pays college expenses for two or more students in the same year, the parent can choose to take credits on a per-student, per-year basis.  For example, the parent can claim the American Opportunity Credit for their college sophomore daughter and the Lifetime Learning Credit for their college senior son.

Here are some key facts the IRS wants taxpayers to know about the American Opportunity Credit and the Lifetime Learning Credit:

1.  The American Opportunity Credit

  • The credit is worth up to $2,500 per eligible student.
  • It is available for the first four years of post-secondary education.
  • Forty percent of the credit is refundable, which means that a taxpayer may be able to receive up to $1,000, even if they owe no taxes.
  • 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, and course related books, supplies, and equipment.
  • The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

2.  Lifetime Learning Credit

  • The credit is worth 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 the taxpayer must pay on their tax return.
  • 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 who make less than $60,000 or $120,000 for married couples filing a joint return.

One final note, taxpayers cannot claim the tuition and fees tax deduction in the same year they claim the American Opportunity Tax Credit or the Lifetime Learning Credit, although the value of a credit is generally greater than a deduction.  For more information about these credits see IRS Publication 970 (Tax Benefits for Education) available at http://www.irs.gov/pub/irs-pdf/p970.pdf