Hope Credit

• For qualifying taxpayers, the Hope Credit is often the most beneficial tax credit. It is available to taxpayers incurring costs related to the first two years of post-secondary education and is phased out and eliminated for middle and upper income taxpayers. This nonrefundable credit is equal to 100 percent of the first $1,200 of qualified higher education costs and 50 percent of the second $1,200, for a total maximum credit of $1,800.
  
  

American Opportunity Tax Credit

• The American Opportunity Tax Credit is a two-year expansion of the Hope Credit and extends coverage to the first four years of post-secondary education. In addition, the credit is equal to 100 percent of the first $2,000 of qualified higher education costs and 25 percent of the second $2,000, for a total maximum credit of $2,500. The American Opportunity Tax Credit is also phased out and eliminated for middle and upper income taxpayers. All taxpayers qualifying for the Hope Credit automatically qualify for the American Opportunity Tax Credit. Taxpayers who are in their third or fourth year of post-secondary education and who would otherwise qualify for the Hope Credit also qualify.
  
  

Lifetime Learning Credit

• Taxpayers who are not eligible to claim either the Hope Credit or the American Opportunity Tax Credit will often find the Lifetime Learning Credit to be the most beneficial credit or deduction available. This credit is eligible for costs incurred in all years of post-secondary education. It is equivalent to 20 percent of the first $10,000 of qualified higher education costs, to a maximum of $2,000. Unlike the Hope Credit and American Opportunity Tax Credit, this credit is available on a per taxpayer basis, and taxpayers paying higher education costs for additional students may not claim additional credits.
  
  

Tuition and Fees Deduction

• Typically, the least beneficial tax credit or deduction is the tuition and fees deduction. This deduction allows a dollar-for-dollar reduction of adjusted gross income for all qualified higher education costs up to $4,000 per taxpayer. Since this is a deduction rather than a credit, the effect on taxable income varies based upon the taxpayer's marginal tax rate.