If you're putting your kids through college, you're probably looking for any tax break you can find. The fiscal cliff deal of 2013 preserved two education-related tax credits, at least through 2017. Depending on your student's curriculum and your adjusted gross income, either the Lifetime Learning credit or the American Opportunity credit might be right for you – but you can't use both, at least not in the same tax year for the same student. You must also forego deducting tuition and student loan interest if you claim either credit.
If your dependent is a graduate student, you can cross the American Opportunity credit off your list immediately. It only applies to the first four years of a student's post-secondary education, and the student must be enrolled in a specific course of study, working toward a degree, at least half-time for one semester a year. Comparatively, the Lifetime Learning credit allows your child to dabble at further education, taking a course here or there, or to go on to graduate school. It's not necessary that she work toward a degree.
Tuition costs and fees, as well as the costs of required textbooks, equipment and supplies, are qualified expenses for both tax credits. You can't use costs such as room and board or insurance, nor can you use any expenses you pay for with a college savings plan. You can't include any costs paid by scholarship, fellowship or a Pell grant.
Amount of Credit
The American Opportunity credit is worth more if you qualify for it. It's worth up to $2,500 as of 2013: 100 percent of the first $2,000 you spend and 25 percent of the next $2,000, so if you spend $4,000 or more in qualified expenses, you get the whole credit. The maximum Lifetime Learning credit is only $2,000. A portion – 40 percent – of the American Opportunity credit is refundable, so even if you owe no taxes, the IRS will send you a check for a portion of the credit. The Lifetime Learning credit isn't refundable, so it can't offer you any cash back.
As with many tax perks, there's a catch to claiming either the American Opportunity credit or the Lifetime Learning credit. The maximum credits -- $2,500 and $2,000 respectively – are available only up to certain income levels. After that, they begin to phase out, and if you earn too much more, you can't claim these credits at all. The phase-out for the American Opportunity Credit begins at modified adjusted gross incomes of $160,000, or $80,000 if you're single. If your MAGI is $180,000 – $90,000 if you’re single – you can’t claim the credit at all. Generally, your MAGI is your adjusted gross income plus any foreign income you excluded on your tax return. The Lifetime Learning credit offers you less wiggle room. The phase-out begins at $124,000 for married filers, or $62,000 for single taxpayers.
- IRS: American Opportunity Tax Credit – Questions and Answers
- Kinkelaar & Associates: What's the Difference Between the American Opportunity Credit and the Lifetime Learning Credit?
- Forbes: You Can Get $10,000 Per Child in College Tax Credits, Thanks to the Fiscal Cliff Deal
- Forbes: IRS Announces 2013 Tax Rates, Standard Deduction Amounts and More
- IRS: Lifetime Learning Credit
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.