American Opportunity Tax Credit
Originally set to expire at the end of 2012, the American Opportunity Tax Credit (AOTC) is now available until December 2017 thanks to the American Taxpayer Relief Act of 2012.
The AOTC is a modification of the Hope Credit and qualifies people who pay no tax as well as those with higher incomes. This credit also allows students to deduct required course material expenses. Another hallmark of the AOTC is that it makes the credit available to students during all four years of college rather than just two.
Single taxpayers who have a modified adjusted gross income of $80,000 or less can qualify for a $2,500 tax credit. Married couples qualify if they are filing jointly and have a modified adjusted gross income of $160,000 or less.
Lifetime Learning Tax Credit
The Lifetime Learning Tax Credit provides an education credit of up to $2,000 per family to help cover the cost of qualified higher education expenses, such as tuition and enrollment fees paid directly to the institution.
The Lifetime Learning Credit differs from the AOTC in that it's available to students for an unlimited number of years. The credit can be claimed by any student participating in a postsecondary degree program or taking courses for job skill attainment.
Single taxpayers can claim the credit if they have a modified adjusted gross income of $62,000 or less. Married couples (filing jointly) must have a modified adjusted gross income of $124,000 or less.
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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. This deduction is a good alternative to those who might not qualify for the AOTC or the Lifetime Learning Credit.
To qualify for the full $4,000 deduction, taxpayers must have a modified adjusted gross income of no more than $65,000 or, if married and filing jointly, $130,000. Taxpayers who have a modified 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.
Remember that the IRS doesn't allow double-dipping. You cannot claim the AOTC and the Lifetime Learning Credit for the same student in the same year. Also, if you claim the tuition and fees deduction, you cannot use the AOTC or the Lifetime Learning Credit.
Student Loan Interest Tax Deduction
Like the tuition and fees tax deduction, this deduction reduces the income subject to being taxed. Taxpayers who paid interest on a student loan in the relevant tax year and have a modified adjusted gross income of less than $75,000 ($155,000 if married and filing jointly) can also take a tax deduction of up to $2,500. The exact amount taxpayers can deduct depends upon the interest paid during the year on the student loan.
See the IRS website to get more tax information for students.