Educational Tax Credits for College Tuition

For most people paying tuition, the American Opportunity tax credit is the best of several choices. Other special breaks are also available for filers with education bills.

Paying for college? You may be able to claim a big tax break, even if you've never before qualified. That's because the Obama administration replaced an old break with a new and improved one but only for a limited time. To take advantage of it, you'll have to negotiate the often wacky world of tuition tax write-offs.

What are the breaks? Who gets them? And how can you best take advantage of them?

First you have to choose among a trio of tax credits and one tax deduction that offset your cost of tuition. Then you have to look at "income exclusions" for profits pulled out of savings to pay college bills and see if you can write off student loan interest.

Breaks for tuition
The latest and greatest of the college write-offs is the American Opportunity Tax Credit. This can reduce your tax or increase your refund by $2,500. To claim the full credit, you must have paid at least $3,000 in eligible college bills and you must meet some income restrictions.

Eligible bills include college tuition, fees and books for you, your spouse or a dependent. Also important for lower-income taxpayers, this break is partly refundable. What does that mean? Most breaks just give you back the tax that you paid through withholding. They typically stop benefiting you once your tax bill is reduced to zero.

Write-offs, exclusions
There are other special breaks for paying education bills that can be used in conjunction with these tuition credits.

For instance, if you take money out of a 529 savings plan, all the investment income (and the principal, of course) is tax free, as long as you use the money to pay for qualified education expenses. If you've already used up your tuition write-offs by claiming a credit against those expenses, don't worry. The 529 money gets tax-free treatment even if it's used to pay for room and board for a full-time student.