Education Tax Credits and Deductions You Should Know About

American Opportunity Credit

The American Recovery and Reinvestment Act (ARRA) created a new tax credit, known the American Opportunity Credit, to help students and parents pay for college expenses. This new credit modifies the popular Hope Credit and makes it more available to people who pay no tax as well as those with higher incomes. It also makes the credit available to students during all four years of college, whereas the Hope Credit was only available for students' first two years.

The full credit, worth $2,500, is available to singles who have an adjusted gross income of $80,000 or less and married couples (filing jointly) who have an adjusted gross income of $160,000 or less. Taxpayers who earn more can get a partial credit reduced ratably from the $2,500 maximum.

Lifetime Learning Tax Credit

The Lifetime Learning Tax Credit provides an education credit of up to $2,000 per family ($4,000 for students in Midwestern disaster areas) to help cover the cost of qualified higher education expenses such as tuition and enrollment fees. Students in Midwestern disaster areas (Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin) can also include books, supplies and reasonable costs of room and board among qualified expenses.

The Lifetime Learning Credit is available to undergraduate students, graduate students and students who are taking some sort of continuing education course, regardless of the number of years in the program. Single taxpayers can claim the credit if they have an adjusted gross income of $60,000 or less. Married couples (filing jointly) must have an adjusted gross income of $120,000 or less.

Remember that the IRS doesn't allow double-dipping. If you take the Lifetime Learning Credit and the new American Opportunity Credit, you will not be able to claim the Tuition and Fees Deduction in the same year.

Tuition and Fees Tax Deduction

Eligible taxpayers can take a Tuition and Fees Tax Deduction of up to $4,000 per household. Qualified expenses for this deduction include any tuition and fees paid to a higher education institution in the relevant tax year. Room and board does not count as an eligible expense.

To qualify for the full $4,000 deduction, taxpayers must have an adjusted gross income of less that $65,000 ($130,000 if married and filing jointly.) Taxpayers who have an adjusted gross income between $65,000 and $80,000 ($130,000 to $160,000 if married and filing jointly) can claim a partial deduction of $2,000.

Student Loan Interest Tax Deduction

Taxpayers who paid interest on a student loan in the relevant tax year and have an adjusted gross income of less than $75,000 ($150,000 if married and filing jointly) can also take a special tax deduction worth up to $2,500. The exact amount taxpayers can deduct depends upon the interest paid during the year on the student loan.

Learn more about education tax credits and deductions on the IRS website, www.irs.gov.