Tax Credits for Independent Students
The IRS offers several tax breaks for students. If you support yourself financially, you can also claim yourself as an exemption on your tax return. The various tax benefits for education cannot be used simultaneously -- even if you are eligible for all of them, you may use only one.
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Credits vs. Deductions
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Both tax credits and tax deductions can reduce your tax bill. You deduct credits directly from your tax due -- for example, if your tax bill is $4,500 and you apply a $600 tax credit, your tax bill is reduced to $3,900. Deductions, by contrast, come out of your taxable income, not your total tax bill. If, for example, your taxable income is $40,300 and you apply a $600 tax deduction, you can reduce your taxable income to $39,700. Consequently, a credit will usually save you more than a deduction will. Nevertheless, if the income cutoff for a lower tax bracket is $40,000, you might save more money by applying a deduction than a credit.
The Lifetime Learning Credit
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The Lifetime Learning Credit is suitable for part-time students, although full-time students may use it too. There is no minimum course load -- even taking one course is enough to qualify for the credit. You must be enrolled in a post-secondary institution, and you must be either a citizen or resident of the U.S. The credit applies to tuition, books and fees that are paid directly to the institution. You may deduct 20 percent of these expenses, up to a maximum credit of $2,000. You must file Form 8863 to claim the credit.
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American Opportunity Credit
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To use the American Opportunity Credit, you must be enrolled at least half-time in a post-secondary institution. It covers tuition, as well as expenses for books and supplies that are not paid directly to your educational institution. It applies to 100 percent of your first $2,000 in qualified expenses and 50 percent of your next $1,000, for a maximum credit of $2,500. You may use it only if you have not completed your second year of post-secondary education by the first day of the tax year. The credit is gradually phased out for taxpayers with adjusted gross incomes of more than $80,000 ($160,000 if married and filing jointly). You must file Form 8863 and Form 1040 to claim this credit.
Tuition and Fees Deduction
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Since the tuition and fees deduction is a non-itemized deduction, you can use it even if you take the standard deduction instead of itemizing your expenses. It applies to tuition, books and related fees. You cannot take it if your modified adjusted gross income exceeds $80,000 ($160,000 if married and filing jointly). The deduction limit is $4,000 per year. You must file Form 8917 and Form 1040 to claim this deduction.
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