Calculate the amount of money spent on qualified expenses: tuition, fees, books, supplies and equipment. Note whether or not the expenses for books, equipment and supplies were paid directly to the institution. These expenses must have been paid to a higher education school that participates in a U.S. Department of Education student aid program. The expenses must be for yourself, a spouse or a dependent you claim as an exemption on your tax forms.
Calculate any scholarships or grants, such as the Pell Grant, that reduced the amount you paid for qualified expenses. This amount is not eligible for further tax credits. Do not include amounts received from loans, gifts, wages or from a student's savings account.
Subtract the amount of grants or scholarships received from the amount paid toward eligible expenses. If a balance remains, you may be eligible for a tax credit. If the grants and scholarships covered 100% of eligible expenses, you generally will not qualify for the tax credit. For example, if your tuition and related expenses were $10,000 and you received a Pell Grant for $4,000, your out-of-pocket expense would be reduced to $6,000 and this is the amount used to determine your eligibility for tax credits.
Obtain detailed guidelines from the IRS for the two tax credits, the American Opportunity Credit and the Lifetime Learning Credit. Determine which one you want to claim, as you cannot claim both tax credits for the same educational expenses.
Determine whether you qualify for the American Opportunity Credit. You must not have any state or federal felony convictions for distributing or possessing controlled substances. You must have been enrolled at least part-time in a program leading to a recognized credential, such as a bachelor's degree. You must not have completed the first four years of college prior to this tax year and this credit cannot have been claimed for you during the past four tax years.
Check to see if you qualify for the Lifetime Learning Credit. The credit is available for unlimited years and reduces the amount of tax a person pays, meaning you must owe tax to receive this credit. The credit does not reduce taxable income, rather it reduces the tax burden dollar-for-dollar up to a limit. The credit is available for all secondary qualified education expenses (tuition, fees and related charges only if paid directly to the school) and the student does not have to be a candidate for a credential. Felony drug convictions do not exclude students from qualifying for this credit.