Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Education Credit

What it is:

An education credit is a tax credit associated with the payment of education expenses during the tax year.

How it works (Example):

Currently, there are three major education credits in the United States (amounts subject to change by the IRS).
1.    The American Opportunity Credit allows for up to $2,500 in tax credit per student.
2.    The Hope Credit allowed for up to $3,600 per student, but this program ended in 2009.
3.    The Lifetime Learning Credit allows for a $2,000 tax credit for undergraduate, graduate, and professional study per student per tax year.

Taxpayers can also get tax deductions for contributing to 529 plans (which help save for college) and paying tuition and fees (if the taxpayer doesn't qualify for the learning credits above). Additionally, withdrawals from IRAs and other investment vehicles are permitted without penalty if they are for qualified higher education expenses.

Why it Matters:

Education credits can help taxpayers cope with the high cost of college educations. It is important to note that a tax credit is a dollar-for-dollar reduction in a person's tax liability; a tax deduction is a reduction in the amount of income subject to tax (and thus is "worth" less than a tax credit).

It is also important to note that most taxpayers cannot claim more than one education credit in the same tax year, which reduces their value.

It is important to note that the expenses must come from an eligible educational institution: that is, one that is eligible to participate in a student financial aid program under Title IV of the Higher Education Act of 1965. (Most colleges, universities, and community colleges are eligible.)