Parents and students have two tuition tax credits programs provided by the Federal Government: the Hope/American Opportunity and the Lifetime Learning. They can qualify for a reduction on their federal income tax bill if they meet certain conditions,  but, they may only claim one credit for the same student in the same year.

A tax credit allows parents(or student) to subtract, on a dollar-for-dollar basis, the amount of the credit from your total federal income tax liability as a opposed to an income tax deduction, which is subtracted from income before taxes are calculated. Thus a tax credit normally results in greater tax savings.

The American Recovery and Reinvestment Act of 2009 (ARRA) or the Stimulus Bill, expanded the existing Hope tax credit and changed the name to the American Opportunity Credit. The expanded credit applies to tax years 2009 and 2010. Previously the Hope Credit could be applied to two years of postsecondary education, the expanded credit can be claimed for four years.  It also expands income eligibility.

To claim this credit, the student must be enrolled at least half-time in a program leading to an undergraduate degree or other legitimate education credential.  

The maximum yearly credit per eligible student is $2,500.

The American Opportunity Credit is partially refundable, which means up to $1,000 could be paid back to lower-income taxpayers when the credit exceeds their total tax bill.

There is no limit on how many family members can receive the credit.

The amount of the credit begins to phase out if your modified adjusted gross income (AGI) is between $80,000 and $90,000 or more for a single return and between $160,000 and $180,000 or more for a joint return.

For parents or guardians to claim a Hope credit for their child’s college expenses, the student must be listed as a dependent on the tax form. If the student is not listed as a dependent on another person’s tax form, he or she can claim the credit.

For exact directions for claiming the American Opportunity credit, and information about a further credit available to students in specified Midwestern disaster areas, consult IRS Publication 970, Tax Benefits for Education.

The Lifetime Learning Credit is available for all years of postsecondary education and for courses (even a single course) that is required or improves job skills.

The Lifetime Learning credit can only be used for tuition and fees. The credit can be claimed for 20 percent of the amount you pay (see maximum limits below).

A taxpayer may claim a tax credit for 20% of up to $10,000 in a combination of tuition and fees. This equates to a $2,000 tax credit in 2008 and 2009.

The amount of the credit begins to phase out if your AGI is between $50,000 and $60,000 for a single return and between $100,000 and $120,000 for a joint return.

Consult IRS Publication 970 for specific rules on eligibility and claiming this tax credit.