A college education is a smart investment, but it's also smart to know which education tax credits you can claim to ease your financial burden. Most Americans with education expenses are eligible for some type of break. You may be able to recoup some of your out-of-pocket expense by qualifying for a refundable or nonrefundable tax credit. Combine either credit with a 529 savings plan -- a tax-free college savings plan -- or an itemized tax deduction for even greater savings.
Refundable or Nonrefundable
Education tax credits can either be refundable or nonrefundable. This only refers to whether the credit reduces the amount you owe on your taxes or if it is an amount the government owes you. A refundable tax credit allows you to get money back from the government even if you owed nothing in taxes: If your tax liability is zero or even if you didn't earn any income, you may get money from the Internal Revenue Service if you qualify for a refundable tax credit. A nonrefundable tax credit can reduce the amount of tax you owe to zero but does not pay anything beyond this amount. You must owe tax to benefit from a nonrefundable tax credit, and the amount cannot exceed your tax burden.
American Opportunity Credit
The American Opportunity Credit is a partially refundable tax credit. The maximum credit is $2,500 and it is 40 percent refundable. The maximum refundable amount is $1,000 per eligible student. This credit is available for 2009 through 2012. Eligible education expenses that qualify for this credit include both course-related expenses not paid to the school and those paid to the school. Students are eligible for this credit during the first four years of postsecondary education only.
Lifetime Learning Credit
The Lifetime Learning Credit is nonrefundable. It reduces the tax owed and is for a maximum of $2,000. Eligible expenses are those course-related expenses paid to the school. There is no limit to the number of years you can claim this credit, and it can be used to pay for undergraduate, graduate, professional and job skill education. This credit cannot be used for the same student receiving the American Opportunity Credit; only one credit can be used per student each tax year.
Tuition and Fees Deduction
The tuition and fees deduction can help reduce your taxable income and help save additional money on your taxes if neither credit covers all your expenses. This deduction is filed on IRS Form 8917. It can be used even if the expenses were paid by a loan, but it cannot be used for the same expenses used to qualify for one of the tax credits or paid from other tax-free funds such as a grant or employer reimbursement. The amount of this credit depends on your modified adjusted gross income and can be either zero dollars, $2,000 or $4,000.
- TurboTax: Education Tax Credits
- Internal Revenue Service: Tax Benefits for Education -- Information Center
- Internal Revenue Service: Tax Benefits for Education
- Internal Revenue Service: American Opportunity Credit
- Internal Revenue Service: Tax Incentives for Higher Education
- Internal Revenue Service: American Opportunity Tax Credit -- Questions and Answers
Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.