The American Opportunity Credit pays you back, in the form of a credit, for 100% of your first $2,000 of qualified education expenses for yourself, your spouse, or your dependents paid in 2013. It also pays you back 25% of the next $2,000 you spend on higher education, for a total credit of $2,500 per student, per year.
To claim the American Opportunity Credit, the student must be in the first four academic years of postsecondary education at an eligible school. It doesn't matter how many calendar years the student has been in school, as long as he or she is in still the freshman, sophomore, junior, or senior year. The student must also be enrolled at least half-time in a program leading to a recognized credential, such as a degree, and cannot have had a felony conviction for possessing or distributing a controlled substance. You can only take this credit for a student for four years.
You may qualify to take the American Opportunity Credit regardless of the amount of tax you owe. Up to $1,000 of this credit is refundable. For example, say you had no income tax withheld and you owe no taxes. You could still get up to $1,000 back for the American Opportunity Credit if you meet the requirements. TaxACT calculates the credit, including any refundable portion, for you.
If you don't qualify because, for example you are not working on a degree or other credential, or you don't meet the half-time requirement, you may be able to take the Lifetime Learning Credit. This credit gives you 20% back of up to $10,000 in qualified expenses.
The maximum Lifetime Learning Credit you can take is $2,000, regardless of how many students are on your return.
You cannot claim the American Opportunity Credit and the Lifetime Learning Credit for the same student, in the same year.
TaxACT calculates your American Opportunity Credit and the Lifetime Learning Credit on Form 8863, Education Credits.
Another tax benefit for education is the tuition and fees deduction. You can reduce your taxable income by up to $4,000 in qualified education expenses, even if you don't itemize deductions. This deduction is an adjustment to income on the first page of your Form 1040. Because it reduces your adjusted gross income, it may also help you qualify for other tax breaks on your return that are based on that amount.
You cannot use the Married Filing Separately filing status and take the education credits or deduction. Your credit or deduction is reduced or eliminated at higher income levels.
The tuition and fees deduction is basically for tuition and fees - it does not include room and board and other expenses. In addition to tuition and fees, it only includes books, supplies, and equipment if you are required to purchase them.
You should receive Form 1098-T with information about your tuition expenses for the year in January or February from the school. TaxACT asks you if you paid tuition costs for yourself, your spouse, and your dependents and determines, based on your information, the education tax breaks for which you qualify.