New York State Tax

Education and Tax Credits

The federal government has two different programs - the American opportunity credit and the lifetime learning credit -- available to help students earn tax credits. The credits reduce the amount of income tax owed at the end of the year. This is different from other programs that offer tax deductions - reduction in taxable income -- for education expenses. The person paying the expense chooses the most advantageous option when he prepares his tax return.

An earlier tax credit program - Hope - expired in 2008, and the American opportunity credit program modified and extended that program through 2012. The credit applies to students earning an undergraduate degree or other recognized credential and is only applicable for the first four years of higher education. The student must be enrolled at least half time during one school period per filing year and have a clean felony drug record. The individual claiming the credit must be the student or the person claiming the student as a dependent. The program allows a maximum tax credit of $2,500 a year for expenses. Expenses include tuition, books, supplies and equipment. If the tax bill is less than the amount of tax credit, 40 percent of the tax credit is refundable up to a maximum limit of $1,000. Eligible taxpayers have a maximum modified gross income limit of $80,000 if single or $160,000 if married and filing jointly.

The lifetime learning credit program provides a maximum $2,000 tax credit per year to eligible individuals. The credit applies to many post-secondary classes; the student doesn't have to enroll in a degree or credential program, and job skill courses qualify for tax credit. A student with a felony drug charge on his record is still eligible for the tax credit. The maximum income limit is $60,000 for single filers and $120,000 for married couples filing jointly. There is no partial refund of the tax credit; the amount paid never exceeds the tax bill. Eligible expenses include tuition and fees but not books or supplies.

If the taxpayer isn't claiming a tax credit, he can claim a maximum tax deduction of $4,000 per year for tuition, books and supplies. This is a useful benefit for individuals whose income is too high to qualify for one of the tax credit programs.