Tax Limits on College Tuition for Federal Taxes

Each education tax break has a limit on how much tuition you can count.

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The Internal Revenue Service lets you pick from several tax breaks for college tuition, but not without limits. Besides the caps on how much of your tuition you can use toward figuring the tax break, each credit or deduction has a set of eligibility criteria. However, even if you're eligible to claim multiple credits, you're limited to one per student.

Tax-Free Assistance

Any tuition paid with tax-free assistance can't be used toward calculating federal tax breaks for education. Tax-free assistance includes scholarships, grants and tax-free employer assistance. It doesn't include money given to you as a gift or inheritance or any student loans you take out. For example, if you have $12,000 in tuition but you get a $7,000 scholarship and $2,000 Pell grant, you have only $3,000 in tuition to use toward your education tax breaks.

American Opportunity Credit

If you claim the American opportunity credit, you can use up to $4,000 of your tuition toward figuring the credit. The credit equals 100 percent of your first $2,000 and 25 percent of your next $2,000 for a total credit of up to $2,500. Even better, 40 percent of your credit is refundable, so you'll get a refund even if you don't have any tax liability. In addition, the American opportunity credit allows you to use books and supplies in figuring the credit if your tuition isn't enough to get the full credit.

Lifetime Learning Credit

The lifetime learning credit allows you to use up to $10,000 of your tuition to figure the credit. If you don't have $10,000 in tuition, you can also use mandatory fees paid to attend, such as a campus fee or a technology fee. However, the credit only equals 20 percent of your expenses, so your maximum credit is $2,000. In addition, it's not refundable so if you don't owe any taxes, it won't do you any good. As a result, if you're eligible the American opportunity credit is usually the better option.

Tuition and Fees Deduction

Like the American opportunity credit, the tuition and fees deduction also allows you to use up to $4,000 for the break. However, it's a deduction rather than a credit, so the amount it will save you depends on your tax bracket, and it's not refundable. For example, if you fall in the 35 percent tax bracket, a $4,000 tuition and fees deduction will save you $1,400. If you won't have any tax liability, it won't do you any good.