College can be very expensive and therefore the IRS has found a way to make it easier for taxpayers to offset some of the expenses they incur on qualified education expenses by providing the following reliefs: 

1. The American Opportunity Credit (AOC)

This credit can help parents and students pay part of the cost of the first four years of college. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student. Generally, 40% percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.

For individual taxpayers, the American Opportunity Credit phases out if modified adjusted gross income is between $80,000 and $90,000. For married filing joint, the credit phases out if MAGI is between $160,000 and $180,000.

Eligibility

• You must have paid qualified education expenses for yourself, your spouse or your dependent.
• The student is completing the first four years of post-secondary education at a qualified educational institution.
• The student is attending school to obtain an undergraduate degree or other recognized education credential.
• The student is enrolled for at least half-time of one academic period that began in the tax year.
• The student has no felony drug convictions.

Determining the Amount of Credit

For each student, the amount of the credit equals the sum of:

• 100% of the first $2,000 of qualified expenses paid for the eligible student
• 25% of the next $2,000 of qualified expenses paid for the eligible student

The maximum credit that can be claimed is $2,500 per student per year.

2. The Hope Credit

(Not Available after tax year 2009)

The Hope Credit can help students and parents pay part of the cost of the first two years of college. This credit generally applies to 2008 and earlier tax years. However, for tax year 2009 a special expanded Hope Credit of up to $3,600 may be claimed for a student attending college in a Midwestern disaster area as long as you do not claim an American Opportunity Tax Credit for any other student in 2009

3. The Lifetime Learning Credit 

This credit can help pay for undergraduate, graduate and professional degree courses – including courses to improve job skills – regardless of the number of years in the program.
The Lifetime Learning Credit provides a maximum non-refundable tax credit of $2,000 per year for all students attending an eligible educational institution in your household. The Lifetime Learning Credit may be limited by your income and amount of tax.

For individual taxpayers, the Lifetime Learning Credit phases out if MAGI is between $51,000 and $61,000. For married filing joint, the credit phases out if MAGI is between $102,000 and $122,000. These limits are significantly lower than the American Opportunity Credit.

Eligibility

• Any student enrolled in one or more courses at an eligible educational institution.
• There are no requirement to be seeking a degree or to be enrolled at least half-time.
• The institution can include nondegree programs to acquire or improve job skills.
• There is no limit on the number of years you can claim the credit.

Determining the Amount of Credit

• The amount of the Lifetime Learning Credit is 20% of the first $10,000 paid for eligible education expenses for all eligible students.
• The maximum amount of credit is $2,000 per household.
• The amount of the credit will be reduced or eliminated if you exceed certain income levels.

Requirements to Claim American Opportunity or Lifetime Learning Credit

• You paid qualified higher education expenses for an eligible student.
• The eligible student is you, your spouse or a dependent for whom you are claiming an exemption.
• The expenses were paid for the current tax year or the first three months of the succeeding tax year.
• Your filing status is single, head of household, qualifying widow(er) or married filing jointly.
• You cannot be claimed as a dependent on another person’s tax return.
• You can claim the American Opportunity Credit for each student (taxpayer, spouse or dependent) on your return, but only one Lifetime Learning Credit per return, regardless of the number of students on the return. In addition, you may claim either the American Opportunity Credit or the Lifetime Learning Credit, but not both,or you may claim the tuition and fees deduction.

Qualifying Expenses

• Expenses are for tuition and related expenses required for enrollment or attendance at an eligible educational institution.
• An eligible educational institution is a college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administrated by the Department of Education.
• Related expenses include student activity fees, expenses for course-related books, supplies, and equipment included in education expenses. These expenses must be paid to the institution as part of enrollment or attendance requirements. (Expenses for books and course-related supplies are treated differently by each credit; see the descriptions above for more information.)
• The expenses are not paid with a tax-free scholarship, fellowship, grant or through an employer-provided education assistance program. This includes Pell Grants and Veterans’ educational assistance.
• Room and board
• Insurance
• Transportation
• Medical expenses
• Expenses related to sports, games, hobbies, and non-credit courses, unless the course is required as part of the degree program

Non-Qualifying Expenses

American Opportunity vs. Lifetime Learning Credit

To claim either credit, complete Form 8863 and attach the form to your Form 1040 or Form 1040A.

4. Enhanced benefits for 529 college savings plans

Certain computer technology purchases are now added to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan.  For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.

5. Tuition and fees deduction

Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American opportunity, Hope, or lifetime learning credits.

You cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year. You also cannot claim any of the credits if you claim a tuition and fees deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.