If you or one of your dependents attended a higher education institution during 2014, chances are you qualify for a nice tax break. However, with several education-related tax breaks available, how do you know which one works best for you?
Here are three major education tax breaks, an explanation of who qualifies for each, and how to figure out which will save you the most money.
The American Opportunity Tax Credit -- great if you qualify
The AOTC is generally the most advantageous of the three tax breaks mentioned here, but it also comes with the most restrictions.
If you qualify, the credit provides for 100% of the first $2,000 in eligible higher education expenses, as well as 25% of the next $2,000. So, if your tuition and other qualifying expenses add up to $4,000 or more, this credit can be worth up to $2,500. Your modified adjusted gross income, or MAGI, must be less than $80,000 ($160,000 for joint filers) in order to take the full credit and it phases out entirely above a MAGI of $90,000 ($180,000 for joint filers).
Credits are much better than deductions, because they reduce your actual tax liability (as opposed to your taxable income) dollar for dollar. This credit is partially refundable, which means that even if it brings your tax liability down to zero, you are still eligible to have up to $1,000 of the credit refunded to you.
Unfortunately, this is also the toughest one to qualify for. In order to take the credit, you must be in your first four years of higher education, and enrolled at least half-time in a degree-seeking program. You cannot claim the credit for more than four years, and those students who have a felony drug conviction on their record are ineligible.
The Lifetime Learning Credit
While not quite as lucrative as the AOTC, the Lifetime Learning Credit, or LLC, can still put a lot of your tax dollars back in your pocket. Many people who qualify for this one don't even know it.
The LLC is worth 20% of the first $10,000 in tuition and other qualifying expenses per year, so you can get up to $2,000. Unlike the AOTC, this one is not refundable, so it can potentially reduce your tax liability to zero, but no further. Also, the MAGI limits to take the full credit amount are significantly lower, at $52,000 and $104,000 for single and joint filers, respectively.
However, while the credit isn't quite as generous, it is much easier to qualify for than the AOC. You don't need to be enrolled in a degree program, nor do you need to be enrolled at least half-time or be in the first four years of college.
All you need to qualify for the LLC is to be enrolled in at least one course at a qualifying higher education institution. So, even if you simply took a class to improve your job skills, you can qualify for the LLC.
Tuition tax deduction
The tuition tax deduction can reduce your taxable income by up to $4,000 and is generally the best option for those who don't qualify for the AOTC and earn too much to claim the LLC. And, you can take the deduction even if you don't itemize.
Qualifications for the tuition tax deduction are pretty much the same as for the LLC, except the income limits are higher. Taxpayers can take the deduction as long as their MAGI is below $80,000 or $160,000 for single and joint filers, respectively.
What expenses qualify?
Once you figure out which credit you qualify for, the next step is to figure out your qualified expenses. Obviously, tuition is included in this, but you can also deduct academic fees and other required costs of attendance. Only for the AOTC can you deduct the cost of books, supplies, and equipment that are a required part of your course of study.
However, expenses such as room and board, transportation, insurance, and other living expenses don't qualify for any of the tax breaks.
If you paid educational expenses for yourself or your child during 2014 (even with money from student loans), chances are that you qualify for at least one of the three credits. You may be surprised at how much money it can put back in your pocket.