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A college degree is crucial to success in today’s job market, but the rising costs of earning a diploma is making it harder for young Americans today. Scholarships, grants and student loans can ease the burden but you could still end up having to cover part of the expense yourself. The good news is you may be able to put some of that money back in your pocket by taking advantage of these key tax breaks for education.

Find out now: Can I afford my student loan payments?

Education Tax Credits

A tax credit reduces the amount of tax you owe. There are two education tax breaks that parents and students can benefit from. The American Opportunity Tax Credit covers up to $2,500 of undergraduate costs for up to four years. This credit was introduced in 2009 as a modification of the existing Hope Credit and it’s set to be available through 2017. The Lifetime Learning Credit can be used for up to $2,000 in qualified education expenses but there’s no limit on the number of years you can claim it. You also don’t have to be enrolled in a degree program, which means the credit is good even if you’re just taking one or two classes.

Who Can Claim These Credits?

There are different guidelines for determining who can claim each tax credit. The American Opportunity Credit is only good towards your first four years of college so you won’t be able to use if it you’re in grad school. The IRS also puts a limit on how much you can earn to qualify for the credit. As of 2013, you can max out the credit if your modified adjusted gross income is $80,000 or less and you file single on your return. If you’re married, the credit is good if your AGI is $160,000 or less.

The income limits for the Lifetime Learning Credit are significantly lower. For 2013, single filers could get the full credit if their adjusted gross income was $62,000 or less. The amount doubles to $124,000 for married couples filing jointly. If you’re married but you don’t file a joint return, you won’t be able to claim either credit.

Deducting Tuition and Fees

If you don’t qualify for either of the education tax credits, you can still save on your tax bill using the tuition and fees deduction. A deduction differs from a credit since it lowers your taxable income instead of reducing your tax liability. For 2013, the tuition and fees deduction was good for up to $4,000 of your higher education costs.

You can take advantage of the deduction as long as you paid qualified expenses for yourself, your spouse or your child. Your ability to claim the deduction is based on what you make and your filing status. The deduction is phased out if you’re a single filer with an AGI of more than $80,000 or a married couples making more than $160,000. Like the American Opportunity and Lifetime Learning Credits, married couples can only claim the deduction if they file a joint return.

What Expenses Qualify?

The education tax breaks are only good for certain expenses. These include tuition, fees, books, supplies and equipment. You can’t claim a credit or a deduction for things like room and board, transportation, health insurance or basic living expenses. You also have to have attended an eligible educational institution. Basically, this means any college, university or vocational school that’s eligible to participate in federal student aid programs. This doesn’t mean that you have to have take out student loans to qualify.

When You’re Eligible for More Than One Tax Break

One of the most important caveats to remember is that you can’t claim more than one credit or deduction for the same expenses in the same tax year. If you’re eligible for both a credit and deduction, you’ll have to figure out which yields the most tax savings. For example, you may be able to claim both the American Opportunity Credit and the tuition and fees deduction based on your income.

Generally, a tax credit is your best option but that may not always be the case. If you qualify for both the Lifetime Learning Credit and the tuition and fees deduction, you’ll need to factor in the amount of expenses you have, your income and your regular tax rate to determine which one would give you the biggest benefit. Understanding how each credit and deduction works is key to getting the most bang for your buck at tax time.

Photo Credit: Internal Revenue Service: Publication 970, Tax Benefits for Education, Internal Revenue Service: Tuition and Fees Deduction, Internal Revenue Service: American Opportunity Tax Credit, Internal Revenue Service: Lifetime Learning Credit

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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