Tax Credit for School Tuition
Postsecondary education always has been expensive and elite. The U.S. government recognizes the value and necessity of a highly educated society; in 1997, Congress passed the Taxpayer Relief Act, which created two tax credits that help financially needy families to reduce their tax burden for qualified educational expenses. Unlike tax deductions, tax credits do not lower taxable income; instead, they reduce the actual tax amount paid. The two educational tax credits are the American Opportunity Credit and the Lifetime Learning Credit, only one of which can be claimed each year.
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American Opportunity Credit
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The American Opportunity Credit specifically aids students who undertake the efforts to attain an undergraduate degree. The credit is worth a maximum of $2,500 per tax year and is available for a maximum of four undergraduate years. Students who claim this credit must attend school at least half time during the academic year in which the credit is claimed. The credit is refundable; if it reduces the claimant’s tax burden beyond his tax liability, he will receive a tax refund.
Lifetime Learning Credit
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The Lifetime Learning Credit provides a reduction in tax burden for Americans who obtain professional development education. The credit is worth a maximum of $2,000 per tax year, with no limit on the number of years in which the credit can be taken. Although the Lifetime Learning Credit reduces tax liability, it cannot be taken as a refund. This credit is available to any student who takes one or more courses, regardless of whether or not he is pursuing a degree.
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Claim Eligibility
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Only the person who pays the qualified educational expenses has the right to claim the tax credit. If the claimant is a parent or guardian, he must also claim as a dependent the student who is receiving the education.
Calculation of the Credit
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The American Opportunity Credit and Lifetime Learning Credit are figured differently, depending upon the qualifying tuition expenses. The American Opportunity Credit allows a student to claim the first $2,000 in tuition expenses and 25 percent of the remaining tuition for a maximum yearly credit of $2,500. The Lifetime Opportunity Credit refunds 20 percent of tuition expenses for a maximum yearly credit of $2,000. Every accredited college or university provides students with a Form 1098-T for all qualified tuition and expenses.
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