College Tuition Tax Credits Explained in Plain English

If you pay college tuition, there are a few tax credits and incentives to help you reduce the financial burden. So even if you are filling out financial aid forms, don’t forget to pursue tax credits too.

First, let’s understand what a tax credit is.

If you pay taxes, a tax credit should be music to your ears. If you qualify, you deduct a credit dollar for dollar against your tax liability. So if you owe the IRS $5,000 and you have a tax credit of $2,000, your tax liability becomes $3,000. Sweet-a-kimbo.

If you pay for college, you might be able to take advantage of one of the following two different college tuition tax credits. (Just remember, you can only claim one credit for each student in any one year.)

American Opportunity Tax Credit

Even if you pay very low income tax (or no tax at all) you can actually get the government to send you a check. You can use this money to pay for tuition, fees, class-related supplies or books.

The student must be in her first years of post-high school education. Also, the student must be in school half-time or more, and the courses must lead to getting a degree or credential.

This year (2011), the American Opportunity credit is 100% of the first $2,000 of the student’s tuition and fees and 25% of the next $2,000. So the maximum credit could be $2,500.

Lifetime Learning Credit

This money has to be used to pay for tuition or fees. The student can use it for any post-high school training that increases job skills. That means you can use it to attend anything from private colleges to graduate school. Even if the courses don’t lead up to getting a degree or certification, the tax credit is available.

To make it even sweeter, you don’t have to carry a minimum number of classes and you can keep claiming the credit for as many years as you like – as long as you qualify. The lifetime learning credit is 20% of the tuition and fees up to $10,000, or $2,000 maximum.

Who can claim either tax credit?

These credits will help you take the sting out of paying for expensive college. But in order to claim either credit, you have to file taxes and have spent money on a student’s (who is a dependent) college education. If the student isn’t listed on anyone else’s tax return as a dependent, she can claim the credit herself. The American Opportunity credit phases out if your adjusted gross income is between $160,000 and $180,000 for joint filers. If you are single, the credit phases out from $80,000 to $90,000 in adjusted gross income.

And if you are married but file separately, you can forget it completely – no credit for you.

The Lifetime Learning credit is phased out for joint filers with adjusted gross income between $100,000 and $120,000. If you are single, you are phased out between $50,000 and $60,000. Again, if you are married but file separately, you get nothing.

You can get more information about these credits by checking out IRS Publication 970.