What Are Education Tax Credits?
The U.S. Internal Revenue Service (IRS) offers several education tax credits. These are one way that the U.S. government helps defray the cost of higher education, along with financial aid programs such as grants and loans. Education credits are claimable either by the student, or by a taxpayer claiming the student as a dependent. The IRS also offers education tax deductions, though their dollar value varies by tax bracket, so tax credits are often the better choice.
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Tax Credits
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Tax credits are "dollar-for-dollar" discounts. The value of a $1,000 credit is $1,000, regardless of your tax bracket. Tax credits are either refundable or non-refundable. If a refundable credit is worth more than you owe in taxes, then you receive the difference. You do not receive the difference if a non-refundable credit is worth more than your tax liability.
American Opportunity Credit
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As of 2010, the American Opportunity Credit gives taxpayers $2,500 in tax relief for four years of post-secondary education. Eligible individuals must earn $80,000 or less in a year, and married couples must earn $160,000 or less. Roughly 40 percent of the credit is refundable, so if an individual owes less in taxes than the credit is worth, he can receive up to $1,000 from the Internal Revenue Service. The American Opportunity Credit is available through funding from the American Recovery and Reinvestment Act.
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Hope Credit
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The Hope Credit applies to students during their first two years of post-secondary education. It is worth up to $1,800 for students at most schools in 2010, or for up to $3,600 for students attending school in Midwestern disaster areas. The credit is non-refundable, so if it is worth more than you owe in taxes, you will not receive the remainder.
Lifetime Learning Credit
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The Lifetime Learning Credit gives students up to $2,000 in tax relief, or $4,000 for students in Midwestern disaster areas. It cannot be claimed in the same year as either the American Opportunity Credit or Hope Credit, but unlike those credits, there is no limit to how many years a student can claim the Lifetime Learning Credit. Because there is no cap for how many times you can claim the credit, it is particularly useful for graduate or part-time study.
Tax Deductions
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The IRS offers Tuition and Fees Deductions (TFD) and Student Loan Interest Deductions (SLID). These can be claimed instead of credits. The TFD is worth up to $4,000 in 2010. It is available to singles earning under $80,000 per year, or married couples making under $160,000. The SLID is good for up to $2,500 as of 2008, for singles earning less than $70,000, or couples making $145,000 or less. A deduction's value changes based on the taxpayer's tax bracket. For example, a taxpayer in the 25 percent tax bracket claiming a $4,000 deduction would receive $1,000 in tax relief. This often makes dollar-for-dollar credits a better value.
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