Countless Americans struggle each year to keep up with the costs of putting a student through college. According to the College Board, tuition and fees for the 2016–2017 school year averaged $33,480 at private colleges, $9,650 at public in-state colleges, and $24,930 at public out-of-state colleges. And you can't help but notice that these figures don't even include room and board, which is often a necessary part of the equation.

Thankfully, the IRS offers a number of tax breaks for students, one of which is the American Opportunity Tax Credit. If you qualify this year, you could see up to $2,500 back on your taxes per eligible student in your household.

Students in a college dorm.

IMAGE SOURCE: GETTY IMAGES.

Saving money with tax credits

Some people use the terms "tax credit" and "tax deduction" interchangeably, but they're not at all the same thing. A tax deduction works by exempting a portion of your income from taxes, and your actual savings are based on your effective tax rate. So if you take a $1,000 deduction and your effective tax rate is 25%, you'll save $250, not the full $1,000.

A tax credit, on the other hand, is a dollar-for-dollar reduction of your tax liability. Claiming a $1,000 credit means saving that amount, in full, on your tax return, regardless of what your effective tax rate happens to be. Understanding the value of tax credits should motivate you to pursue as many as possible, especially when you're dealing with college tuition.

How the American Opportunity Tax Credit works

The American Opportunity Tax Credit can save you as much as $2,500 per qualifying student in your household. The math behind it is a touch complicated, but if you're eligible, you'll receive 100% of your first $2,000 in qualified educational expenses, plus 25% of the next $2,000 in qualified educational expenses, per student, for a total of $2,500.

Still following? Here's an example that might help. Let's assume that, based on your income level, you're eligible to take the credit in full (more on that in a minute). If you spent $4,000 last year on qualified higher-education expenses, you can claim the first $2,000 back in its entirety, plus 25% of that additional $2,000, or $500 -- for a total of $2,500.

What's a qualified expense? With regard to the American Opportunity Tax Credit, qualified expenses run the gamut from tuition and fees to books, supplies, and equipment related to specific coursework. So if your child needs lab equipment for his or her chemistry major, those materials are covered. Furthermore, to qualify, you or your child must be pursuing a degree at a qualified institution, and the credit must be claimed for expenses incurred during the first four years of education.

Income limits

As tends to be the case with most tax credits, earning too much money could render you ineligible for the American Opportunity Tax Credit. If you're a single tax filer, your modified adjusted gross income (MAGI) must be $80,000 or less to receive the credit in full. If your MAGI falls between $80,000 and $90,000, you can get a partial credit, but you can't take claim it at all if you earn more than $90,000.

If you're married filing jointly, you can take the full credit if your MAGI is $160,000 or less. You'll qualify for a partial credit with a MAGI between $160,000 and $180,000, but earnings over $180,000 leave you ineligible.

And there's a partial refund

Most tax credits are non-refundable, which means the most they can do is eliminate your tax liability and leave it at that. One major benefit of the American Opportunity Tax Credit is that it's partially refundable, which means that, if it knocks your tax liability down below zero, you could receive up to 40% of the remaining credit amount (up to $1,000) as a tax refund.

If you're a student or are financing college on a student's behalf, it pays to see whether you're eligible to claim the American Opportunity Tax Credit this year. As long as you meet the right criteria, a little extra effort on your tax return could pay off in a very big way.

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