How to Maximize College Tax Benefits

The U.S. tax code includes built-in education incentives.

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The Internal Revenue Code offers several tax benefits for those who pay higher education expenses. These benefits apply whether you are paying your own expenses or someone else's. You can't use all of these benefits at the same time for the same student -- they are alternatives to each other -- so you can maximize your tax benefits by using the credit or deduction that bests suits your particular circumstances.

The American Opportunity Credit

The American Opportunity credit applies to tuition, books and certain fees. You can use it for up to four years per student as long as the student is studying at least half-time in a degree-seeking program. The credit is phased out for taxpayers who earn more than $80,000, or $160,000 if married and filing jointly as of 2012. The credit is worth up to $2,500. Since it is a tax credit, you deduct it from your total tax due rather than your taxable income. You can even claim a tax refund of up to $1,000 if your credit exceeds the amount of taxes you would otherwise owe.

The Lifetime Learning Credit

If the student you support is not enrolled in a degree-seeking program or not enrolled at least half-time, you are not eligible to take the American Opportunity credit. You may be eligible for the Lifetime Learning credit, however. Even if you are eligible for both credits, however, you must choose only one. Unlike the American Opportunity credit, you can use the Lifetime Learning credit for as many years as you like. This credit applies to expenses for tuition, books and certain fees. It is gradually phased out for taxpayers with modified adjusted gross incomes greater than $51,000, or $102,000 if married filing jointly. The credit is limited to $2,000 per tax return, and you can't use it to claim a tax refund.

The Tuition and Fees Deduction

If you are ineligible for either of the education tax credits, you may be able to claim the tuition and fees deduction. This deduction is phased out for taxpayers with modified adjusted gross incomes of more than $65,000, or $130,000 if married filing jointly. Since the tuition and fees deduction is taken out of your taxable income, you won't save as much money using it as you would if you could use one of the tax credits. You may deduct up to $4,000 from your taxable income for tuition and required enrollment fees; however, you cannot deduct expenses for books. You can't use the deduction together with either of the credits for the same student.

Coverdell Education Savings Accounts

In many cases, room and board cost more than tuition. A Coverdell education savings account allows you to save tax-free dollars for a wide variety of educational expenses -- tuition, books, fees, supplies, equipment, and room and board. You may contribute no more than $2,000 of your Coverdell contributions each year no matter how many students you are saving for. Your beneficiary must be under 18 or qualify as a "special needs" student during the time you make contributions, although he may withdraw funds after he turns 18. As long as your beneficiary's withdrawals are less than his eligible education expenses, distributions are not taxable.