Refundable and Nonrefundable

• A refundable tax credit is one that can reduce your tax liability to less than zero resulting in an overpayment of your taxes. This would result in a tax refund, which is why it is called a refundable tax credit. In contrast, a nonrefundable tax credit can only reduce your tax liability to zero. Even if the end result is less than zero, meaning you overpaid your taxes, you would not get a tax refund because the overpayment was caused by a nonrefundable tax credit.
  
  

Tax Credits and Deductions

• Tax credits, as opposed to tax deductions, are applied to your tax liability, rather than to your income. For example, if you make $20,000 and owe $2,000 in taxes, and you take a tax credit for $500, it will be applied to your liability, reducing the amount of tax you owe to $1,500. If you take a tax deduction for $500, it will be applied to your income, so that your taxable income will be reduced to $19,500. The basis on which you calculate your tax liability will be $19,500 rather than $20,000, resulting in a lower tax bill. (Ref 1)
  
  

American Opportunity Credit

• The American Opportunity Credit can be taken for the first four years of college. If you are eligible, the credit allows you to claim up to $2,500 for qualified educational expenses, such as tuition and fees. Up to 40 percent of the credit is refundable, if the refundable portion of the credit exceeds your tax liability. Your modified adjusted gross income (MAGI) cannot exceed $90,000, unless you are filing jointly, in which case your MAGI cannot exceed $180,000.
  
  

Lifetime Learning Credit

• The Lifetime Learning Credit can be taken at any stage of your college career. The Lifetime Learning Credit is a nonrefundable tax -- it can only reduce your tax liability to zero. You can receive a credit of up to $2,000 if your income does not exceed $60,000, or $120,000 if filing jointly. If you take this credit, you cannot take the American Opportunity Act credit or the tax deductions that are also available. Only one of the three educational tax breaks can be taken per student. However, if you have multiple students, you can take one credit for one and a different credit for the other.