A Guide to Educational Tax Credits

Going to college is expensive, but Uncle Sam is helping out. There are several types of education tax credits parents or students may qualify for to offset a portion of higher education fees. Unlike some basic tax deductions, there are a variety of education tax credits that could apply to you. There are three different options, including the American Opportunity Tax Credit, the Lifetime Learning Credit and the tuition and fees deduction.

Many people aren't sure what they can qualify for or which tax credit is the most beneficial. "Don't be intimidated by the options. Just know there is probably a benefit you'll get after paying all those expenses," says Allison Flores, principal tax research analyst at The Tax Institute at H&R Block.

"These days, education is so expensive, and this will help anyone who has education expenses," Flores says.

Which college credit is best for you? Experts point to the American Opportunity Tax Credit as the most valuable credit, which is worth up to $2,500 per child. "This credit is dollar-for-dollar for the first $2,000 of a student's expenses, and then 25 percent of the next $2,000," Flores says.

"The American Opportunity Tax Credit is more generous, especially if you have a couple of kids in the first four years of college. If you have two kids in college, you could get $2,500 for each," says Lisa Lewis, certified public accountant at TurboTax and U.S. News My Money blogger.

The American Opportunity Tax Credit also allows students to include more school-related expenses than the Lifetime Learning Credit, which only includes tuition and fees. What could be included under the American Opportunity credit? "Course-related books, supplies and maybe even a computer if it is a requirement of your enrollment. Keep receipts of related books or supplies," Lewis says.

What are the criteria to qualify? The student must be enrolled at least half time and pursuing a degree program. If you are taking a class for fun, that wouldn't qualify here. The American Opportunity credit is only available for four years per student, which also includes any years the former Hope Credit was claimed.

"A fifth-year senior wouldn't be able to claim the credit if it has been used in the previous four years," says Steve Ribble, founder of Tampa, Florida-based Guardian Accounting Group.

Also, to be eligible, the student must have no felony drug conviction as of the end of 2014. "If a kid has been busted for drugs, they'd be looking for the Lifetime Learning Credit," Ribble says.

There is an income requirement: Income cannot be over $90,000 if single and $180,000 for those married filing jointly. When it comes to filing time, this credit can be claimed for yourself, spouse or dependent. Most students are claimed as dependents by their parents. "In that scenario, the parent can claim the tax credit on their return," Flores says.

The Lifetime Learning Credit. This credit could help students in graduate school or those who have already claimed four years of the American Opportunity Credit, and it's available up to $2,000 per return.

You don't need to be pursuing a degree program to qualify for this credit. "If you are in graduate school, you'll have to take the Lifetime Learning Credit for tuition and fees deduction. You can use these if you are just taking one class to improve your skills for your job," Lewis says.

To qualify, income cannot be over $64,000 if single and $128,000 if married filing jointly. This can be claimed for yourself, a spouse or a student you claim as a dependent on your return.

Tuition and fees deduction. The last choice is not a credit, but a deduction worth up to $4,000, which lowers your adjustable-gross income. This is available for an unlimited number of years for higher education, and the student must be enrolled in at least one class at an eligible school.

Experts say credits are the better deal for taxpayers. "Tax credits reduce your tax liability dollar for dollar," Lewis says. That compares to a tax deduction, which reduces your taxable income.

"You can deduct up to $4,000 on your tax return. This is more valuable for the person in graduate school who is working at the same time but doesn't qualify for the Lifetime Learning Credit because their income is too high," Flores says.

To qualify, your income cannot be over $80,000 if single and $160,000 married filing jointly.

Refundable versus nonrefundable. There are two types of education tax credits: refundable and nonrefundable. The American Opportunity Credit is partially refundable up to $1,000. "The lower-income parent who doesn't owe taxes may benefit from the $1,000 refundable portion," Flores says.

The Lifetime Learning Credit is not refundable. You could apply this credit to pay taxes owed, but you wouldn't receive it back as a refund.

Forms you'll need. The college will send Form 1098-T, which is a tuition statement, to the student, and also to the IRS. Another record to keep is your account history from the school, which includes what was billed by the school. For more information, see IRS Form 8863 for education credits.

In the majority of cases, the American Opportunity Tax Credit is more valuable, if you qualify. As you dig into your tax credit and deduction choices, stay hopeful. "If you can't qualify for one, you might qualify for another," Ribble says.