The cost of college and university study can place a significant financial burden on students and families. Data provided by the U.S. Bureau of Labor Statistics show that students at four-year public institutions paid $15,918 on average for tuition, room and board for the 2010-2011 school year and students at private schools paid $32,617 on average. The federal government offers a choice of tax credits and other tax breaks for students and families who pay tuition.
American Opportunity Credit
The American Opportunity Credit is a higher education tax credit of up to $2,500 that applies to tuition and fees required for enrollment or attendance for up to four years at a post-secondary educational institution. Course-related books, supplies and equipment are also qualifying expenses, but room, board and transportation costs do not qualify. The credit is available if you pay for tuition and fees for yourself, your spouse or a dependent you claim on your tax return and have a modified adjusted gross income of $80,000 or less as a single taxpayer or $160,000 or less as a joint filer.
Lifetime Learning Credit
The Lifetime Learning Credit is another higher education tax credit. Like the American Opportunity Credit in that it applies to tuition and required fees. On the other hand, the credit does not cover course-related books, supplies and equipment and the maximum credit amount is capped at $2,000. To claim the credit, your modified adjusted gross income must be $61,000 or less as a single taxpayer and $122,000 or less as a joint filer.
Tuition and Fees Deduction
If you don't qualify for either credit -- for example, if you earn too much to qualify for the Lifetime Learning Credit, and you've taken the maximum four years of the American Opportunity Credit -- you might still qualify for the tuition and fees deduction of up to $4,000. Unlike a tax credit, which directly reduces tax liability, a tax deduction reduces your total taxable income, making it less valuable than an equivalent credit. The deduction for tuition and fees applies to tuition and required fees paid for yourself, a spouse or a dependent. The deduction is limited to single taxpayers with a modified adjusted gross income of $80,000 or less and joint filers who make $160,000 or less.
Even if you qualify for all three of the tax breaks, you can only claim one of the three on your tax return -- and it makes sense to claim whichever one saves you the most money. The American Opportunity Credit offers the greatest potential tax savings and 40 percent of the credit is refundable, which means you can get a tax refund of up to $1,000 for claiming the credit even if you owe no income tax.
- Internal Revenue Service: Tax Benefits for Education: Information Center
- Internal Revenue Service: American Opportunity Tax Credit
- Internal Revenue Service: American Opportunity Tax Credit: Questions and Answers
- Internal Revenue Service: American Opportunity Credit
- Internal Revenue Service: Lifetime Learning Credit
- U.S. Department of Education, National Center for Education Statistics: Tuition Costs of Colleges and Universities