College education expenses? Look at these education tax benefits:

The American Opportunity Tax Credit (AOC)

The AOC is larger in scope than the old Hope Credit and is the supreme education tax benefit. The AOC can be a credit of up to $2,500 instead of the Hope credit which was limited to $2,000 only. The other thing is that the Hope could only be used for the first two years of school, the AOC is good for all four years. That is a monumental improvement. There are a bunch of ands ifs and buts so lets dig in and get a handle on them.

One really nice thing is that the AOC is a tax credit just like the old Hope but with the AOC you can even get a refund back of up to $1,000 from the government. For example, if you calculate out the tax you owe in April for the recent tax year and you owe $1,500 but then you qualify for the full AOC of $2,500 credit; then you would actually get a thousand bucks from Uncle Sam. The limit is 40% of the AOC;  40% x $2,500 = $1,000.  $2,500 is the max AOC available. The max you can receive back from the government is 40% of your AOC.  That makes $1,000 the highest check you can possibly get back from the government. Looking at another example: your tax liability was $1,300 and you qualified for the full AOC credit of $2,500.  In this case you do not get the full $1,200 dollar difference back in a check from Uncle Sam. You can only get $1,000.  That's the max. There is a worksheet available that gives you the right answer if your situation is some oddball number of tax liability and/or amount of AOC credit.

The other thing to know is what do you need in order to qualify for the max AOC instead of a smaller amount of AOC.

You must spend at least $4,000 on qualifying expenses to get the max $2,500 AOC credit. What expenses are qualifying expenses? Obviously tuition and fees. In a departure from previous tax incentives to encourage higher education, the AOC allows other expenses to also qualify. Books and even other required course matierials which some professors will require. For example, if a professor requires you to have some special little software package that you have to buy.

Tax Deductions for Tuition and Fees

Lets say one of the disqualification reasons we just listed applies to you. You cannot get the AOC tax credit. You can still take the normal deduction up to $4,000 (or the amount you spent on tuition and fees, if less than $4,000). This tax deduction is not as good, obviously as the AOC tax credit. But it can still have a substantial impact on your tax burden. Let's say you are in the 25% tax bracket. Your actual $ savings to you is then 25% of the deduction amount so if you get a $4,000 tax deduction, you are actually $1,000 richer in real money when all is said and done.

Just in case it is not already clear, there is no double dipping allowed. You cannot take both the AOC and the tuition tax deduction for the same student in the same tax year. You can choose either the AOC. Or you can choose the normal deduction up to $4k. But you cannot take both.

You may be able to take the deduction if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. The deduction is based on the amount of qualified education expenses you paid for the student in the academic school year for academic periods beginning in the academic school year and the first 3 months of the following year.

Generally, in order to claim the deduction for qualified education expenses for a dependent, you must have paid the expenses in the academic school year and must claim an exemption for the student as a dependent on your tax return (line 6c of Form 1040 or 1040A). For additional information, see chapter 6 of Pub. 970. You cannot claim the tuition and fees deduction if any of the following apply:

Student Loan Interest Tax Deduction

For those of you who are now in the pay-back phase of your student loan, you get a little break too. The interest portion of your payments on your stud loan paid during the year is tax deductable. Unless, of course, once again, your income is too high. Again, the income levels are $80k for singles and $160k for marrieds. If you are above those, the deduction begins to phase out.

One other good point about both the tax deduction for tuition and fees and the tax deduction for student loan interest paid is that they are both above the line deductions. This means you get to deduct them whether or not you itemize your deductions on schedule A. Even if you just take the standard deduction, you still get these write offs.

The Lifetime Learning Tax Credit

The lifetime learning tax credit is really quite broad in its applicability. It applies not only to undergraduates and grad students but also to vocational courses and schools and even professional level courses. Qualified expenses on this credit include, as usual, tuition and fees. It also applies to other course materials such as books and equipment, but on this credit there is the further stipulation that those expenses must have been paid directly to the teaching institution itself. So if you bought the book from the off-campus private bookstore, you're out of luck for the cost of that book.

Cha-ching.   If you or your college bound student is looking for a complete overview of financing sources to pay for college,  here is a complete, though brief, five page summary covering everything from federal financing sources to alternative and creative ways to pay for school.