The most generous tax breaks for college costs are the American Opportunity Tax Credit and Lifetime Learning Credit, which offset your tax bill dollar-for-dollar compared to a tax deduction that merely reduces the amount of income subject to tax. You can't claim both credits for the same student in the same year, and income limits restrict who can claim them.
For 2014, you can claim the American Opportunity Tax Credit of up to $2,500 if your student is in his or her first four years of college and your income doesn't exceed $160,000 if you are married filing a joint return ($80,000 for single taxpayers).
Above these income levels, the credit is phased out. The credit is based on 100% of the first $2,000 of qualifying college expenses and 25% of the next $2,000, for a maximum possible credit of $2,500.
The American Opportunity Tax Credit can be claimed for as many eligible students as you have in your family.
For example, if you have three kids who are all in their first four years of college, you can potentially qualify for up to $7,500 of American Opportunity Tax Credits. Up to 40% of the American Opportunity Tax Credit amount is refundable. That means you can collect at least some of any credit amount that is left over after your federal income tax bill has been reduced to zero.
The Lifetime Learning credit—which can be as much as $2,000, based on 20% of up to $10,000 of qualifying higher-education expenses—is available for an unlimited number of years for just about any degree or non-degree course. But you can only claim one Lifetime Learning credit per year, no matter how many students you have in your household. For 2014, the income limit for the Lifetime Learning credit is $107,000 if you are married filing a joint return ($53,000 for single taxpayers). Above these income levels, the credit is phased out.
You cannot claim both the American Opportunity credit and the Lifetime Learning credit for the same student in the same year.