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1. American Opportunity Tax Credit: Part of the American Recovery and Reinvestment Act of 2009, this college tax credit essentially replaces the Hope scholarship tax credit. It only applies to the first four years of post-high school education and provides up to $2500 in tax credit for each student in college. It is calculated on a dollar-for-dollar basis on the initial $2000 of higher education costs and then accrues 25 cents to the dollar for the next $2000 spent. The college tax credit phases out for single taxpayers with modified adjusted gross income of $80,000 to $90,000 and for married couples with combined incomes between $160,000-$180,000. Also, it is available per student in college, so a family could receive potentially thousands of dollars of offset if they have multiple children in college.
2. Lifetime Learning Credit: This is a per-taxpayer, and not-per-student tax, incentive that credits 20 cents per dollar for costs related to high education expenses up to a maximum credit of $2000. The credit phase-out range for single taxpayers is a modified adjusted gross income of $48,000-$58,000 and $96,000-$116,000 for married couples.
3. Tuition and Fees Deduction: Taxpayers can opt out of above options and choose instead to take a tuition tax deduction of up to $4,000 for higher education costs. It is available to single tax payers with a modified adjusted gross income less than $65,000 and less than $130,000 for married couples.
The American Opportunity Tax Credit will likely be a top pick among college-goers and their families; however, students planning on pursuing advanced degrees may prefer to opt for the Lifetime Learning Credit. The Tuition and Fees Deduction is a good option for families whose salary ranges price them out of the first two tax credit options.