Uncle Sam is helping online students with a host of tax credits—including an education tax credit as part of the federal stimulus program.
As you work through your 1040 or 1040EZ form and calculate your adjusted gross income, you will see what your tax is based on the chart the IRS provides. You can subtract your tax credit directly from your tax bill, reducing the amount you must pay the government.
For example, if you look up your adjusted gross income in the tax chart and find that you owe $4,000, and you qualify for $2,500 in education tax credits, you can subtract $2,500 from $4,000—meaning you will only owe the government the difference ($1,500).
Keep in mind that education tax credits are different from education tax deductions. Deductions are adjustments you make to your income—before your actual tax is determined. (For more information about education tax deductions, see Best Tax Deductions for Online Education.)
You are only allowed to take ONE education benefit. You can’t take BOTH an education credit and an education tax deduction.
You also can’t take more than one credit per student.
Here’s a rundown of education tax credits. These are available to you whether you are taking courses from an online college or an on-campus program.
American Opportunity Credit
This credit came about through the stimulus plan (the American Recovery and Reinvestment Act of 2009), and was extended through 2011 and 2012 by the Tax Relief and Job Creation Act of 2010. It increases benefits to parents and students for the 2010 and 2011 tax years. It replaces the Hope Credit, which no longer is available.
~ You qualify for the full credit if your adjusted gross income is $80,000 or less ($160,000 for married couples filing jointly).
~ Up to $2,500 per year per student
~ Applies only to the first four years of college (must be pursuing a degree)
~ Books and supplies are eligible student expenses (as well as tuition and fees)
~ Pays 100 percent of the first $2,000 of qualified educational expenses, then 25 percent for the next $2,000
~ This is a per-student credit, so if you have more than one student, you can claim separate credits for each of them
~ Unlike other credits, the American Opportunity Credit is “refundable.” This means if your credit is more than your income tax, the IRS will refund you the difference, up to $1,000 (For example, if your income tax is $2,000 and you qualify for a full $2,500 credit, Uncle Sam will cut you a check for the $500 difference.)
Lifetime Learning Credit
~ Income limit for full credit: adjusted gross income $61,000 filing solo; $122,000 for joint return.
~ Up to $2,000 for qualified educational expenses per year per student
~ Covers only tuition and fees, not books or other materials
~ Pays 20 percent of first $10,000 of qualified educational expenses
~ Applies to all students, including graduate students and those taking just one course (you do not have to be pursuing a degree)
~ No limit on the number of years it can be claimed
~ Is claimed per RETURN, not per student—educational expenses for more than one student are combined, but you will receive just one credit