Have you or one of your family members been thinking about returning to college? As the recession drags on, more and more Americans are deciding to return to school to complete a degree or switch careers. While the U.S. government provides several financial aid sources, taxpayers may still have to pay some of their education expenses out of their own pockets. To ease this financial cost, the IRS allows individuals to take advantage of two education tax credits: The Lifetime Learning Credit and the American Opportunity Tax Credit. 

Qualified Education Expenses

First, it's important to understand exactly which costs are eligible for these credits. The institution you attend must be a qualified higher education provider. In general, if your school qualifies for the Pell Grant, it's considered a qualified institution. Once you choose an accredited school, you'll have to make sure that the costs you pay are eligible for a tax credit. For both of the higher education tax credits, tuition and enrollment fees are considered qualified education expenses. If you want to claim the Lifetime Learning Credit, you can also claim your expenses for course materials.

Lifetime Learning Credit

The Lifetime Learning Credit is primarily for adults who are returning to college after years in the workforce. You can claim it for an unlimited number of years and you only have to be enrolled in one course to be eligible to use it. This credit can be particularly helpful for those who are attending school on a less than part-time basis and need a flexible schedule to complete their training. You don't even have to be pursuing a degree program to use the credit - any skills or job training will suffice. To claim the tax credit, keep up with your tuition, fees, and materials costs for the tax year and deduct them on Form 8863, along with your federal income tax return.

American Opportunity Credit

On the other hand, the American Opportunity Credit is best reserved for someone who is enrolling in college for the first time to pursue a four-year degree. To be eligible for the credit, you must enrolled in a degree-granting program on a half-time basis or greater. Unlike the Lifetime Learning Credit, you can only use the American Opportunity Credit for the initial four years of your higher education. You can claim the American Opportunity Credit on Form 8863 as well.

Both the Lifetime Learning Credit and the American Opportunity Credit can provide valuable tax credits for taxpayers. If you qualify for both credits, you can only use one per tax year, so it is wise to calculate them both and find out which will offer the biggest tax break.