<p>I am asking this question for my parents because they didn't go to school here and not sure what credit(s) they qualify for/ will give them the most tax credit. So from what I understand there are three types of ways my parents can get tax credit for the tuition (and Parents PLUS loan) they are paying for my college education. I think they are paying about $1000 and taking a $7300 PLUS loan and paying for books and other miscellaneous expenses. They make about $55000. So there are 3 ways they can get the tax credit- American Opportunity Tax Credit, Lifetime Learning Credit and The Tuition and Fees Deduction. Now my questions are---</p>
<ul>
<li>Which will give them the most Tax Credit?</li>
<li>Can they take both Opportunity tax credit and Lifetime Learning Credit.</li>
</ul>
<p>Someone please help me understand this.</p>
<p>The American Opportunite Tax credit is generally the one that gives the most financial benefit, up to $2500.</p>
<p>No, you can’t take the AO and the lifetime in the same year for the same student. Only one ot the other.</p>
<p>From what I’ve heard from my Tuition and Fees deduction will give back upto $4000 whereas AOTC will give back $2500. So Isn’t the TFD the better option?</p>
<p>No.</p>
<p>The tuition and fees deduction is a deduction against income, not a tax credit. They are very different. A deduction reduces taxable income by a maximum of $4000, meaning you save the taxes you would pay on that $4000. For instance if taxable income was $30,000, the deduction would reduce the taxable income to $26,000. this does not translate into a $4000 savings in tax. How much you would save would depend on your tax rate. So at the lower end of the scale with a tax rate of 10% you could save $400 (4000 x 10%). A person with a higher tax rate would save more - but to save more than the AO credit would mean having a tax rate of over 62.5% (62.5% of 4000 is $2500).</p>
<p>The AO is a tax credit, this means it reduces your taxes by up to $2500. Also up to 40% ($1000) of the AO is what they call a refundable credit. A refundable credit means you can get it even if your income is not high enough to owe that much in taxes.</p>
<p>Deduction reduces income. Credit reduces actual taxes.</p>
<p>A simple example of the difference would be: if a person had taxable income of $50,000 and had a 20% tax rate and taxes of $10,000 (unrealistic and simplifies numbers). The deduction would reduce the taxable income by $4000 and would save $800 in taxes (4000 x 20%). The tax credit would reduce taxes by $2500.</p>
<p>Which credits/deductions you are eligible for depends on your income and the students year in school. The credits phase out at higher income levels.</p>
<p>There may be further implications based on whether the school is a FAFSA-only or CSS school. For FAFSA-only schools, the AOC and other education credits show up as allowances against income (lines 44 and 91), and thus the credit won’t count against you when filling out the following year’s FAFSA. For CSS schools, I’ve found that some will use the information on education credits (line PI-145A on the CSS) by adding this amount back in as untaxed income. For the CSS schools whose financial aid offices I’ve talked to, it seems that some will treat this as untaxed income, while others will not.</p>
<p>Agree, the AO tax credit will almost certainly be the optimal choice for parents of an undergrad in your parents’ income range.</p>
<p>Thanks guys for clearing that up specially @swimcatsmom for that thorough explanation. Appreciate it.</p>