It’s tax season, and if you wrote a bunch of checks to pay for college tuition last year it is time for someone to write you a check for a change. That check may soon be in the mail if you are eligible to claim the American Opportunity Tax Credit (AOTC), a tax credit that reduces your federal tax dollar-for-dollar up to $2,500 per eligible college student for whom you paid tuition expenses.

Clearing Up The College Credit Confusion

As Ronald Reagan said, “The nine most terrifying words in the English language are, I’m from the government and I’m here to help.” A tax credit for paying college tuition expenses is a big help to families, but as usual the government has made claiming the credit confusing, and that’s because there are actually three college credits and a tuition and fees deduction to choose from. According to the IRS, a lot of people must have been confused last tax season, because 3.1 million families claimed college tax credits improperly.

So first, let’s clear up all of this college tax credit confusion.

Which College Credit Should You Claim?

There are three college-related tax credits, the American Opportunity Tax Credit, Lifetime Learning Credit and the Hope Scholarship Tax Credit, as well as one deduction, the tuition and fees deduction. You may only claim one credit or the deduction in any given year. The American Opportunity Tax Credit (AOTC) is the logical choice because it is by far the richest at up to $2,500 per eligible child, versus $2,000 and $1,800 for the Lifetime and Hope credits. Think of the AOTC as a super Hope Credit. The AOTC came about as a result of the infamous “stimulus package” legislation during the recent economic calamity, and essentially took the Hope Credit and made it worth more, and made it available to more families. This credit which was set to expire at the end of 2012 has been extended for five years as part of the so-called "fiscal cliff" deal that also extended many of the Bush-era tax credits.

American Opportunity Tax Credit Is Worth The Most

The AOTC is worth up to $2,500 per student for four academic years (remember though that it expires this year). The income phase-out is $160,000 - $180,000 of modified adjusted gross income on joint tax returns ($80,000 - $90,000 for single tax filers and head of household). The amount of the credit is calculated as 100% of the first $2,000 in qualified tuition and fees costs paid, plus 25% of the next $2,000 paid for such fees. For lower income taxpayers the credit is refundable up to $1,000, but not for dependent children.

Which College Expenses Count?

