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How Tuition Tax Credits Work

        Money | Taxes

The IRS helps out college students with a number of tuition credits.

Going to college isn't just about afternoons perfecting your corn hole game, late night orange crush parties and early mornings waking up on the quad with only a vague idea about how you got there. It's also about stuff like, you know, learning a thing or two and maybe even preparing yourself for life as an adult. On that score, one of the first thing that students should wrap their brains around is that higher education ain't cheap.

Whether you're going to trade school at night, pursuing a master's degree in business or writing a Ph.D. thesis on the mating rituals of the Amazonian wasp, there is tuition to pay and books and other supplies to buy. There's also the small matter of keeping a roof over your head and food on your plate. While the tax breaks available for students and those who support them aren't going to come close to covering this financial burden, they can help ease the pain a bit.

There are two major sources of tax savings for tuition and other expenses: the Lifetime Learning Credit (LLC) and the American Opportunity Tax Credit (AOTC). Both the LLC and AOTC are tax credits, which means that they reduce the amount of money that a tax filer owes at the end of the year. That's different than a deduction, which lowers a person's taxable income. The credit is applied on a dollar-for-dollar basis. A person who takes a $1,500 AOTC or LLC, for example, will owe the government $1,500 less than they would without the credit [sources: IRS, IRS].

It's important to be familiar with each of these credits because you can't claim both in the same year. We'll explore the benefits and restrictions of each one on the next pages.