The two education tax credits, side by side

Two federal tax credits can lower the tax owed on a year of college costs. This page lays them out side by side so you can see which rules fit your situation, then confirm the details with the IRS.

What each credit is for

The American Opportunity Tax Credit is built for the early years of a degree. It covers a student who has not finished the first four years of higher education, is working toward a degree or other recognized credential, and is enrolled at least half-time for at least one academic period that starts in the tax year. It can be claimed for the same student in no more than four tax years.

The Lifetime Learning Credit reaches more kinds of study, though its maximum is lower. It has no limit on the number of years and no half-time requirement, and it also covers single courses taken to gain or improve job skills. That makes it the usual fit for graduate school and part-time study.

Refunds, expenses and limits

Part of the American Opportunity credit is refundable, which means it can come back to you even when you owe no income tax. The Lifetime Learning Credit can bring your tax down to zero but cannot produce a refund on its own. The IRS publishes the maximum for each, and the income limits, every year.

The American Opportunity credit counts tuition, required fees and course materials such as books and supplies needed for class, even when bought somewhere other than the school. The Lifetime Learning Credit counts tuition and the fees the school requires you to pay to it, and it is figured per return rather than per student.

Before you claim either credit

• Your Form 1098-T from the school
• Receipts for required books and supplies
• Records of scholarships and grants received
• Whether anyone will claim you as a dependent

Rules that apply to both

You can claim only one of the two credits for the same student in the same year. On one return, though, a family can claim the American Opportunity credit for one student and the Lifetime Learning Credit for another. Both are claimed on Form 8863, filed with the federal return.

Expenses paid with tax-free scholarships or grants cannot be counted toward either credit, since the same money cannot lower your taxes twice. If someone claims you as a dependent, that person claims the credit for your expenses. People using the married filing separately status cannot claim either one.

Where to check your own numbers

IRS Publication 970 explains both credits in full, and an interactive tool on the IRS website walks through which one may apply. A Volunteer Income Tax Assistance site, usually called VITA, can prepare a return that claims a credit at no charge for people within its income limit.

Your school's Form 1098-T is a starting point, but your own receipts and account statements are what support the claim. The credit follows the tax year in which you paid, so a bill paid in December for a term starting in January can count in the year you paid it.