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Refundable & Nonrefundable Education Tax Credits

what is a refundable credit

Parents may be eligible for a tax credit for education expenses they pay.

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A college education is a smart investment, but it's also smart to know which education tax credits you can claim to ease your financial burden. Most Americans with education expenses are eligible for some type of break. You may be able to recoup some of your out-of-pocket expense by qualifying for a refundable or nonrefundable tax credit. Combine either credit with a 529 savings plan -- a tax-free college savings plan -- or an itemized tax deduction for even greater savings.

Refundable or Nonrefundable

Education tax credits can either be refundable or nonrefundable. This only refers to whether the credit reduces the amount you owe on your taxes or if it is an amount the government owes you. A refundable tax credit allows you to get money back from the government even if you owed nothing in taxes: If your tax liability is zero or even if you didn't earn any income, you may get money from the Internal Revenue

Service if you qualify for a refundable tax credit.

American Opportunity Credit

The American Opportunity Credit is a partially refundable tax credit. The maximum credit is $2,500 and it is 40 percent refundable. The maximum refundable amount is $1,000 per eligible student. This credit is available for 2009 through 2012. Eligible education expenses that qualify for this credit include both course-related expenses not paid to the school and those paid to the school. Students are eligible for this credit during the first four years of postsecondary education only.

Lifetime Learning Credit

The Lifetime Learning Credit is nonrefundable. It reduces the tax owed and is for a maximum of $2,000. Eligible expenses are those course-related expenses paid to the school. There is no limit to the number of years you can claim this credit, and it can be used to pay for undergraduate, graduate, professional and job skill education. This credit cannot be used for the same student receiving the American Opportunity Credit; only one credit can be used per student each tax year.

Tuition and Fees Deduction

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