Filed under: Taxes, College, College Savings Plans, Education, Tax Credits
Americans struggling to finance the rising cost of college can get help paying these bills from an unlikely source: the Internal Revenue Service. Let's look at two of the most popular tax credits that apply for educational expenses and who can qualify to take them.American Opportunity Credit
The American Opportunity Credit -- formerly known as the Hope Credit -- is intended for undergraduate students pursuing a degree program. Under the credit, you can get back 100 percent of your annual qualifying educational expenses up to $2,000, plus an additional 25 percent on the next $2,000 for a maximum total of $2,500. The credit is available for up to four years.
Income limits apply, with single filers making $80,000 or less and joint filers with income of $160,000 or less getting the full benefit. The credit starts to phase out above those levels, and above $90,000 and $180,000 respectively, the credit is no longer available. Families with more than one student in school at the same time can claim a credit for each student.
Qualifying expenses for the credit include tuition, books, supplies, equipment for courses and mandatory student-activity fees. Not included are room, board and other living expenses.
One unusual benefit is that the American Opportunity Credit is partially refundable, meaning that even if you don't owe any income tax before the credit is applied, you can still get money back as a tax refund. Nonrefundable credits, by contrast, only help those who have tax liability; otherwise, they're essentially worthless. The refundable portion of the credit is limited to 40 percent, so you still need to have some tax liability in order to take full advantage of the credit.
Lifetime Learning Credit
The Lifetime Learning Credit is designed to cover students that the American Opportunity Credit doesn't, so you can't claim both in the same year. The Lifetime Learning Credit is just 20 percent of up to $10,000 in eligible expenses.
But the main advantage of the Lifetime Learning Credit is evident from its name: it can cover graduate students and non-traditional students who attend classes in a piecemeal manner without necessarily pursuing a specific degree program.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.