Eligibility

• To be eligible to take either of the credits or the deduction, you must meet certain standards to qualify. You must have paid qualified higher education expenses for an eligible student who is yourself, spouse or a dependent you claim on your taxes. For an expense to be eligible you must be attending an eligible educational institution, defined as one that participates in the federal financial aid program. If your modified adjusted gross income is $90,000 ($180,000 if fling jointly) or more, you cannot take the tax credit. If it's between $80,000 and $90,000 ($160,000 and $180,000 if filing jointly) your credit will gradually be reduced. If your income is over $80,000 ($160,000 if filing jointly), you cannot take education expenses as a tax deduction. You must be enrolled at least half-time to take the American Opportunity Credit. The Lifetime Learning Credit can be taken even if you only take one class.
  
  

Eligible Expenses

• Both the tax credits and the deduction allow you to claim your tuition, enrollment fees, books, supplies and equipment needed for your course of study. However, if you claim your books as a tax deduction, instead of a credit, you cannot deduct your books, supplies or equipment unless you buy them directly from the school.
  
  

Credit/Deduction Amounts

• The IRS recommends that you figure your taxes using each credit or deduction you can qualify for to determine which gives you the greater tax benefit. The American Opportunity Act gives you a credit of up to $2,500 that reduces your 2010 taxes owed. The Lifetime Learning Credit can reduce your taxes by up to $2,000 for qualified expenses. If you take the tax deduction, you can reduce your income by up to $4,000 with qualified expenses.
  
  

Other Deductions

• Under the student loan interest deduction, you can reduce your income by the amount of interest you paid on your student loans in the tax year. You can deduct the required interest payments as well as any additional interest payments you chose to make. This option is available for taxpayers with a modified adjusted gross income of less than $70,000 ($145,000 if filing jointly). It can be taken for both undergraduate and graduate school, and eligible expenses of the loan include tuition, fees, books, supplies, equipment, transportation and room and board.