(UPDATE: The giveaway is now closed. We have a winner! See the comments for more info.)
It's Back To School Week on the blog!
Education tax credits can help you pay for the costs of higher education. Credits are great because they are dollar for dollar reductions in your taxes due as opposed to deductions which merely reduce your income subject to tax. Additionally, sometimes, as with the American Opportunity Credit, you can actually get money back with credits – even if you don't owe any tax!
There are two credits that you should know about:
The American Opportunity Credit (the souped up Hope Credit) is worth up to $2,500 per eligible student. An eligible student must be pursuing an undergraduate degree or other recognized education credential; be enrolled at least half time for at least one academic period that begins during the tax year; and may not have a felony drug conviction.
You figure the credit by adding 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student.
Forty percent of the American Opportunity Credit may be refundable. This means that if the refundable portion of your credit is more than your tax, the excess (up to $1,000) will be refunded to you – even if you owe zero tax.
The Lifetime Learning Credit is a credit of up to $2,000 for qualified education expenses paid for all eligible students.
Unlike the American Opportunity Credit, there is no limit on the number of years the lifetime learning credit can be claimed for each student. This makes the credit particularly attractive for graduate students or those students taking only a few classes.
The credit is completely nonrefundable. And, also unlike the American Opportunity Credit, felony drug convictions don't affect eligibility.
For purposes of both credits, qualified expenses include tuition and fees required for enrollment. This includes amounts you were required to pay to the institution for course-related books, supplies and equipment. Equipment may include a computer and other technology related accessories if those are needed as a condition of enrollment or attendance at the educational institution.
Qualified education expenses do not include amounts paid for insurance, medical expenses (including student health fees), transportation, room and board and similar personal, living, or family expenses – even if the payment of these expenses are a condition of enrollment or attendance.
You cannot claim either of these credits if someone else claims you as a dependent on his or her tax return. Both credits are subject to income limitations and may be reduced or eliminated depending on your income.
As with the tuition and fees deduction, you can use money that you borrow in order to calculate the credit but you cannot claim the credit based on expenses paid with tax-free scholarship, fellowship or grant money, a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance.
Remember that you can't claim the tuition and fees deduction and education credits for the same tax year. You'll want to run the math and figure out which is most beneficial to you. Remember, every little bit counts.
And that brings us to our next giveaway!