Two tax credits, the American opportunity credit and the lifetime learning credit, can help students and their parents defray education expenses. As the names indicate, these educational assistance options are credits rather than deductions, so they take a bigger bite out of your tax bill.
A deduction reduces your taxable income, which can, but is not guaranteed to, reduce your final tax bill. A credit, however, is subtracted directly from the final tax you owe.
American opportunity credit
The American opportunity credit is an enhanced version of the previous Hope educational assistance credit. Under provisions in the American Taxpayer Relief Act of 2012, also known as the "fiscal cliff" tax bill, the American opportunity credit is available through the 2017 tax year.
The American opportunity credit is worth $2,500, whereas claiming the Hope got you at most $1,800. Even better, up to 40 percent of the American opportunity credit is refundable, meaning you could get up to $1,000 back as a refund even if you don't owe any taxes.
There are income limits on who can claim the American opportunity credit, but they are greater than were those associated with the Hope tax credit. Now you can earn up to $80,000 if you're a single filer -- twice that if married filing jointly -- and still claim the full American opportunity credit. A reduced credit amount is available for single filers who earn up to $90,000 and joint filers making up to $180,000.
While the American opportunity credit is improved, it still has some restrictions. It can only be used to claim expenses incurred during the first four years of college.
Lifetime learning credit
If your educational costs are beyond four undergraduate years of college, you'll want to look at the lifetime learning credit. It lives up to its name. It can be used for undergraduate, graduate and professional degree courses for anyone.