Tax season is approaching, and with it, new opportunities to take advantage of educational tax credits passed by Congress.
Tax credits usually have a greater impact than deductions because credits are more direct -- you can immediately apply them to your tax liability. That is, the credit will be subtracted directly from the tax that you owe. Deductions, on the other hand, reduce your taxable income, and indirectly reduce the tax you owe. You can't claim both deductions and credits, so it's a good idea to know your options. See available deductions here.
American Opportunity Credit
The American Opportunity Credit, part of the recent multi-billion dollar stimulus package, is an expansion of the previous Hope Credit. It is a $2500 credit that can be claimed for tuition, fees, and other expenses paid in the first four years of undergraduate study.
- $2,500 / student
- Families with multiple students can take one credit/student
- Applies to the first four years of college
- Covers books, supplies and other course materials, along with tuition and fees
- You'll receive a 100% credit for the first $2,000 of tuition, fees, and course materials paid during the year, plus 25% credit of the next $2,000 paid (this equals $500)
- Even people who owe no tax can receive credit of up to $1,000 / student. (That is, if the tax you owe is less than the amount of the credits you can claim, you can still get the credit).
- To claim the credit, you must complete Form 8863
To be eligible, you must use this only for undergraduate study, and your income should be $80,000 or less (married couples filing jointly can have an income up to $160,000).
Lifetime Learning Credit
The Lifetime Learning Credit is a credit of up to $2,000 available to students of any age and in any program -- undergraduate, graduate, or single courses. Unlike the American Opportunity Credit, the Lifetime Learning Credit does not have a limit on the number of years it can be claimed.
The full credit is only available to those making up to $50,000 ($100,000 for married couples filing jointly). Those making between $50,000 and $60,000 can claim a partial credit.
Check with the IRS or your tax advisor to learn more about any of these education credits and requirements.