- A tax deduction is an expense you subtract from your income to arrive at your "taxable" income. A tax credit is a figure you subtract from the taxes you owe. Some, but not all, tax credits may be awarded as refunds if your tax liability is less than the credit. Dollar for dollar, a credit is worth more than a deduction.
- The American Opportunity Tax Credit is a credit of up to $2,500 a year for up to four years for tuitions and fees at qualified post-secondary schools. To take the full credit, your income must not exceed $80,000 if filing as a single or $160,000 if filing as a couple. The Lifetime Learning Credit is a credit of 20 percent of tuition and book expenses up to $10,000 a year without restriction on the number of years, and can be used for part-time students. To take this full credit your income must not exceed $60,000 if filing as a single or $120,000 if filing as a couple. The credits are available to the student, if not claimed as a dependent on another's tax return, or the parent -- if the student is a dependent -- making tuition and fee payments.
- The post-secondary deduction is available to tax filers with incomes under $65,000 if single or $130,000 if married. It is limited to$4,000 a year per family for each of four years of post-secondary education for each student. It is available for tuition and related fee expenses.
- Look first at your modified adjusted gross income to find out which, if any, of the credits and deduction you qualify for. If you qualify for both credits and deduction, then apply the deduction first to see how much that would reduce your tax liability. If it is less than $2,000 or $2,500, then take the largest credit applicable to your or your student's situation.
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