Tuition tax credits likely don't apply to grandparents

Q: I hear that a person who pays for tuition directly to a university will be able to recoup some of the cost on their taxes. I've paid for my grandson's college. Am I eligible for this deduction?A: Unfortunately, it's not likely you qualify unless a few important specifics apply to your situation.

What you heard about was the new American Opportunity Credit, which provides a tax credit — different from a deduction — for qualified education expenses paid on behalf of an eligible student.

The credit — up to $2,500 — reduces the amount of tax you owe. A deduction reduces the amount of income that is subject to tax, thereby reducing the amount you owe but not by as much. Look for IRS Form 1098-T, which most schools will provide to students.

The AOC applies only to 2009. A different credit, the Lifetime Learning Credit, can include tuition paid toward the first three months of 2010 too. I'll address that below.

There are strict income limits on who can take the AOC credit. For a couple who has paid for their child's tuition, the limits are $180,000 in modified adjusted gross income for a joint return, $90,000 for single or head-of-household filers.

Most important, however, is you must be able to claim the student as a dependent on your tax return. So benevolent grandparents, while it might be the only way a grandchild can attend or afford college, would not qualify for the credit if the student is still a dependent on the parent's, or parents', return.

The Lifetime Learning Credit has no limit on the number of years you can take it — AOC is good for just four years of study — and you don't have to be a degree-seeking student as the AOC requires. It's perfect for those looking to get ahead in today's tough job market.

The LLC is up to $2,000, and income limits are slightly lower — $120,000 modified adjusted gross income for joint filers and $60,000 otherwise.