If you or one of your dependents is currently enrolled in college or continuing education classes, then you may be eligible for a tuition tax credit. Tax credits allow you to subtract, on a dollar for dollar basis, the amount of the tax credit from the total amount of tax that you owe to the Internal Revenue Service (IRS). Federal tax credits are substantially different from tax deductions, which simply allow you to deduct specific amounts from your taxable income, before calculating the amount of tax due.
The Hope/American Opportunity Tax Credit
With Congress's passage of the American recovery and reinvestment act of 2009 (ARRA, and also known as the Stimulus Bill), Congress expanded the existing Hope tax credit. The expanded version of the Hope tax credit is now referred to as the American Opportunity Tax Credit. The new terms of the credit apply to tax years 2009 and 2010 only.
The Hope credit allowed for the credit to be applied to two years of postsecondary education however the American Opportunity Credit version allows the credit to be claimed for four years, and also expands eligibility to people and higher income tax-free brackets .
American Opportunity Tax Credit Eligibility
In order to claim eligibility for the tax credit, you must pay qualified education expenses when the student is either: yourself, your spouse or another dependent person for whom you can claim an exemption on your income tax return.
Eligible expenses for the tax credit are: school tuition, books and required supplies and equipment. Also included are any activity fees or other costs that are required for enrollment or attendance at a qualified educational institution.
The tax credit
is not available for married persons that file separate income tax returns. Furthermore, the tax credit is not available for students that have been convicted of a felony drug charge.
The Lifetime Learning Credit
In addition to the Hope credit or American opportunity tax credit, the Lifetime Learning Credit provides tax credits for tuition and related expenses as well. Whereas the American Opportunity Tax Credit is only available for four years of tuition and related expenses, the Lifetime Learning Credit has no limit on the number of years that it can be claimed.
The fundamental difference between the Lifetime Learning Credit and the American Opportunity Tax Credit is the fact that the American Opportunity Tax Credit is based per eligible student, and the Lifetime Learning Credit is a credit amount per return - regardless of the number of eligible students.
Similar to eligibility requirements for the American Opportunity Tax Credit, the Lifetime Learning Credit can only be claimed if you pay qualified education expenses when the student is either: yourself, your spouse or a dependent person for whom you can claim an exemption on your income tax return.
The Lifetime Learning Credit has no restriction on felony drug convictions; therefore, individuals with a felony drug conviction can still utilize the tax credit.
As you can see, there are a couple of different tax credits available to help with tuition expenses; furthermore, both of them allow you to deduct for tuition, books and other required fees and costs. Which credit you can claim on your income tax return will depend upon your own situation. But, either tax credit can help offset the costs of an expensive college education.