Deductions and Credits for Students

To encourage young Americans to pursue higher education, the Federal government offers a number of different tax savings and credits to students. Even if someone only attended a single eligible college course during 2013, that person is considered a student for some or all of the tax advantages college attendees enjoy. The most significant of these advantages are those of the American Opportunity tax credit and the Lifetime Learning tax credit. Both of these credits can reduce your tax debt dollar for dollar up to a certain limit.

If you are eligible for the American Opportunity tax credit, the amount of taxes you owe can be reduced by up to $2,500 per year in your first four years of college. To be eligible for this credit, you have to prove you are enrolled in a program that is leading to a degree, certificate, or recognized credential -- and that for at least one semester that year you attended half-time or more. This tax credit is based on the amount of money you pay each year for tuition and fees, textbooks, and educational supplies, whether to the school or to outside businesses. Because this is a credit and not a deduction, if a student owes no taxes at all the IRS will actually send money to that student -- up to 40% of the qualified credit amount.

The Lifetime Learning tax credit requirements are not as strict. For this credit, which can be up to $2,000 per year, you have to show that you were enrolled in one college-credit-earning course during the tax year. The credit goes toward money paid directly to the educational institution, such as tuition, equipment, and textbooks.

Those who are not eligible for the American Opportunity or Lifetime Learning tax credits may still be able to get a break. The IRS offers a tuition deduction of up to $4,000 -- whether you itemize or take the standard deduction when you file.