The American Opportunity Tax Credit and Lifetime Learning Credit offer another way to reduce your taxes while paying for college.
American Opportunity Tax Credit (formerly the Hope Credit). As part of the American Recovery and Reinvestment Act of 2009, the Hope Credit was expanded and rechristened. It is now available for four years of college and can be used for course materials, in addition to tuition and fees. This credit equals 100 percent of the first $2,000 and 25 percent of the second $2,000, for a maximum credit of $2,500 per student. To qualify for the American Opportunity Credit, your child must be pursuing a degree, going to school at least half time and not have a felony drug conviction. The full credit is available to you in tax year 2009 if your modified adjusted gross income is less than $80,000 ($160,000 for joint filers) with a phase out at $90,000 ($180,000). A larger Hope Credit ($3,600 maximum), with special rules, is available to students in certain Midwest disaster areas.
Lifetime Learning Credit. With the Lifetime Learning Credit, you can claim up to 20 percent of the first $10,000 paid for college tuition and fees, for a maximum credit of $2,000 per tax return. Unlike the American Opportunity Tax Credit, there is no limit on the number of years you can claim the Lifetime Learning Credit. It may be used for undergraduate and graduate courses and even for tuition and fees when your child is attending school less than half time. But, you can only claim the credit once per tax return, no matter how many children you have enrolled in college at the same time.
The full credits are available to you in tax year 20091 if your modified adjusted gross income is less than $48,000 if you are a single taxpayer and $96,000 if you are married filing jointly. The credits phase out if your modified adjusted gross income is between $48,000 and $58,000 if you're a single taxpayer, and between $96,000 and $116,000 if you are married filing jointly. You can't get either of these credits if your modified adjusted gross income is $58,000 or above if you are a single taxpayer, $116,000 or above if you are married filing jointly or you are married filing separately.
If you qualify for an American Opportunity Credit or Lifetime Learning Credit, you can still claim the credit even if you make a withdrawal from a 529 plan or ESA. You just can't apply the credits based on qualified expenses paid with 529 or ESA moneyMore information on the availability of these credits can be found in IRS Publication 970: Tax Benefits for Education.
1 See IRS Publication 970 for 2010 updates.