There are two basic types of tax credits: refundable and nonrefundable.

Refundable credits can be taken in full, even if they exceed the amount of taxes you owe, while nonrefundable credits cannot reduce your tax liability beyond zero, so you can take a nonrefundable credit only up to the amount of taxes you owe.

The American Opportunity Tax Credit is a refundable credit (even if only up to 40%) instituted with the American Recovery and Reinvestment Act (ARRA) in 2009 to replace a previous educational tax credit known as the Hope Credit.

This credit is available for undergraduate college education expenses and has a limited life span (2009 through 2012) unless Congress decides to extend the credit to other years.

Eligibility for the American Opportunity Credit imposes income limits, so, if you’re a single taxpayer with a MAGI (modified adjusted gross income) of $80,000, you can claim the full credit. The credit phases out between $80,000 and $90,000 if single, and $160,000 and $180,000 if married filing jointly.

Eligibility for the Saver’s Credit depends on your AGI, filing status and contribution amounts made to a qualified retirement plan.

You can claim the credit if:

• You or your employer make eligible contributions to a retirement plan;
  

You can contribute to any qualified retirement plan including 401(k), traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA, the federal Thrift Savings Plan, or 503(b) plans.

In order to claim the credit you need to file a Form 8880 with your tax return. You will need the total amount of qualifying contributions for the tax year to enter into lines 1 through 2. You will also need the information for any distributions you took during the tax year. The amount of the credit is calculated using a multiplier based on the amount you contributed, your adjusted gross income and filing status.

You cannot claim this credit for rollover distributions, a contribution made to repay a previous distribution, or any money received from military retirement plans. Employee stock dividends that are reinvested are also not eligible for the credit.

These income limits apply whether you claim the tax credit for yourself, your spouse or your dependents, so long as the student is enrolled at least half-time in a college, university or other accredited post-secondary education institution. You cannot take the credit for yourself if you are claimed as someone else’s dependent.

The credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses.

If you have several dependents, you can claim up to $2,500 per eligible student, per year.

The credit covers 100% of the first $2,000 of qualified education expenses, plus 25% of the next $,2000.

Up to 40% of the American Opportunity Tax Credit is refundable, meaning that you can get up to $1,000 refunded even if your tax liability is zero.

Qualifying education expenses for this credit are tuition and related course materials (fees, books, supplies).

The American Opportunity Credit applies to all four years of undergraduate college education.