College Tax Credits
The American Opportunity Tax Credit and Lifetime Learning Credit offer two ways to reduce your taxes while paying for college.
American Opportunity Credit
This credit—which reduces the amount of income tax you may have to pay—is available for four years of college and can be used for course materials, in addition to tuition and fees. Forty percent of the American Opportunity Credit may be refundable. This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. To qualify for the American Opportunity Credit, your child must be pursuing a degree, going to school at least half time and not have a felony drug conviction. Income limits apply: see the IRS American Opportunity Tax Credit information for details.
Lifetime Learning Credit
With the Lifetime Learning Credit, you can claim up to 20 percent of the first $10,000 paid for college tuition and fees, for a maximum credit of $2,000 per tax return. You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Unlike the American Opportunity Tax Credit, there is no limit on the number of years you can claim the Lifetime Learning Credit. It may be used for under-graduate and graduate courses and even for tuition and fees when your child is attending school less than half time. But, you can only claim the credit once per tax return, no matter how many children you have enrolled in college at the same time. Income limits apply: see the IRS Lifetime Income Credit information for details.
If you qualify for an American Opportunity Credit or Lifetime Learning Credit, you can still claim the credit even if you make a withdrawal from a 529 plan or Coverdell Education Savings Account (ESA). You just can’t apply the credits based on qualified expenses paid with 529 or ESA money. If you are eligible to claim the lifetime learning credit and you area also eligible to claim the American Opportunity Credit for the same student in the same year, you can choose to claim either credit, but not both.
More information on the availability of these credits can be found in IRS Publication 970: Tax Benefits for Education.