The Internal Revenue Code provides both tax credits and deductions that may be taken to reduce the federal income tax burden for students or those paying the costs of a student’s higher education. Briefly, credits directly reduce the amount of income tax owed, while deductions reduce the amount of taxable income upon which income taxes are computed. Per IRS regulation, WWU reports all tuition charges, financial aid, grant or scholarship payment information for students on the 1098T (see below).
American Opportunity Tax Credit
This new education tax credit is available for 2009 through 2012 (expanded from the formerly existing Hope credit).
Applies to the first four years of post-secondary education
Tax credit of up to $2,500 of the cost of qualified tuition and related expenses paid during the taxable year
Based on 100% of the first $2,000, plus 25% of the next $2,000 of tuition, fees, and course materials paid during the taxable year
Qualified tuition and related expenses has been expanded to include expenditures for “course materials”
Eligibility is limited to taxpayers with adjusted gross income of $90,000 or less ($180,000 or less for joint filers)
Lifetime Learning Credit
The Lifetime Learning Credit may be claimed for the qualified tuition and related expenses of the students in the taxpayer’s family (i.e., the taxpayer, the taxpayer’s spouse, or an eligible dependent) who are enrolled in eligible educational institutions. The credit may be up to $2,000 for undergraduate, graduate and continuing education coursework taken to acquire or improve job skills.