What Tax Credits Are Available for Higher Education?

If you are currently pursuing a higher education, you no doubt are acutely aware of the lofty expenses involved.

Fortunately, in addition to government grants and financial aid, the tax code makes a variety of tax credits and incentives available to those who are saving for, or already paying, costs for higher education.

Here are a few of the main credits and incentives that are obtainable.

American Opportunity Credit

The American Opportunity Credit, which expanded on the existing Hope Credit, provides for a maximum credit of $2,500 as a reimbursement on qualified education expenses spent on each student. The credit is equal to 100 percent of all eligible expenses up to the first $2,000, and then 25 percent on each student thereafter up to the remaining $500.

In order to take the credit, the student whose expenses you paid must be within 4 years of their postsecondary education. They also must be in some sort of degree program, and, as an odd but sensible IRS requirement, not be convicted of a felony for possessing or distributing an illegal narcotic.

The American Opportunity Credit is a refundable credit, meaning that even if you owe no tax, you may still be eligible for a refund comprised of this credit.

Lifetime Learning Credit

The Lifetime Learning Credit compensates 20 percent of all qualified expenses paid up to a maximum of $10,000. This does not mean that the credit is for $10,000, but rather that the 20 percent can be applied to a maximum of $10,000 in expenses paid out.

The credit therefore can yield a maximum of $2,000.

You cannot combine the American Opportunity Credit and the Lifetime Learning Credit for the same individuals.

The Lifetime Learning Credit is non-refundable, meaning it can reduce your tax liability down to zero only. An excess will not be refunded to you.

Qualified Expenses

For either credit, expenses that qualify include books and any other required supplies for the courses. However, the American Opportunity Credit says that these expenses can be purchased anywhere, where as the Lifetime Learning Credit stipulates that they must be purchased from the school.

For either credit, you cannot take a deduction for dorming or other room and board, medical expenses, transportation to and from school, or any expenses incurred with a non-credit activity, such as a sports program.

Tuition and Fees Deduction

In lieu of claiming the above credits, it may be more cost-effective to take a deduction for tuition and related fees that you have paid. You do not need to itemize your deductions to take these costs.

Tuition and fee deductions can reduce the amount of income you will be taxed on by a maximum of $4,000.

In order to take this deduction, the amounts paid out must be for qualified secondary education, paid for a person eligible who is either yourself, your spouse or your dependent whom you are also claiming on your tax return.

Remember too that you can take a deduction for the amount of interest paid on your student loan, as well as take advantage of certain tax benefits of planning for secondary education.

For more information on all of the above, the IRS makes Publication 970 available, Tax Benefits for Education.

More from this Contributor:

Parents, make sure you are taking advantage of these four tax credits

Are you eligible for the Child Tax Credit?

The tax impact of a significant life event