Education Credit

An education credit is a type of tax credit available to students of a post-secondary educational institution, such as a college or university.

Education credits may be claimed by those who incur qualifying educational expenses, such as tuition and fees. Parents who pay these expenses for their children may be able to claim this type of credit on their tax returns, subject to certain income restrictions.

There are two types of education credits: the American Opportunity Tax Credit and the Lifetime Learning Credit. The American Opportunity Tax Credit applies to first- and second-year postsecondary students, with certain restrictions. The Lifetime Learning Credit applies to all students at the undergraduate or graduate level. You cannot claim both the Hope and Lifetime Learning Credits for the same student in the same year.

The American opportunity tax credit is a credit to offset approved education expenses, which tax paying students can claim for the first four years of post-secondary schooling. The credit pays up to $2,500 per year, and if the credit reduces your tax burden to less than zero, the government will send you a check for up to 40 percent of the remaining credit, or as much as $1000. The American Opportunity Education Credit was passed in to law as part of the 2009 American Recovery and Reinvestment Act, and it expanded on the already existing Hope education credit. 

The Lifetime Learning Credit has broader eligibility requirements than the American Opportunity Education Credit, as it is intended for taxpayers of all education levels and ages. The lifetime learning credit can be used for a wide range of schools, from vocational training or professional degree courses, as well as for tuition at more traditional four-year undergraduate and graduate schools. There are income limits for claiming this credit, however, and single taxpayers with modified adjusted gross income of more than $65,000, or married filers with a modified adjusted gross income of more than $130,000 cannot claim the credit.

Critics of subsidies for higher education have long argued that education credits are one reason that the cost of higher education has been rising many times faster than inflation. According to these critics, education credits simply raise the overall cost of college without actual increase access to it,  because tax credits make more money available for spending on education, but do nothing to increase the supply or quality of schooling.