Paying for a college education ranks right up there with buying a home and automobile as one of the largest investments Americans make. On average, in-state tuition and fees at a four-year public college increased by more than 8 percent (to $8,244) for the 2011-12 academic year, and room and board now averages more than $17,000 per year.

A variety of credits, deductions and savings plans, however, should help you cut your college costs come income tax time.

The American Opportunity and Lifetime Learning Credits are likely to result in the greatest tax rewards on your 2011 federal return, due April 17. The following basic requirements apply to both credits:

Filing status on the return cannot be “married filing separately.”

The student must be you, your spouse or a dependent for whom you claim an exemption.

A dependent cannot claim the credits if claimed on another person’s (e.g., parents’) return.

If you do not claim the dependent exemption (even if entitled to the exemption), you cannot claim a credit based on that dependent’s expenses.

Claim credits on Form 8863 and file with your Federal 1040.

According to Jessi Dolmage, spokeswoman for TaxACT, both credits cannot be claimed for the same student: “If multiple students are claimed on a return, the taxpayer should choose the credit that yields the biggest benefit for each student.”

The American Opportunity Credit is a modified version of the Hope Credit. It’s worth up to $2,500 for tuition, fees and course materials per student for the first four years of postsecondary education. Even if you have zero tax liability, you can get up to 40 percent as a refund. It phases out at higher incomes.

The Lifetime Learning Credit is worth up to 20 percent of the first $10,000 in higher-education expenses per family for an unlimited number of years. Like the American Opportunity Credit, it phases out at higher incomes.

Several other college and higher-education tax breaks can also be claimed on this year’s federal tax returns:

Up to $2,500 in student loan interest paid each year for qualified higher-education expenses can be deducted, even if you don’t itemize. The deduction phases out at higher incomes and is reduced by nontaxable distributions from a Coverdell Education Savings Account; savings bond interest used for education expenses and scholarships; or veterans’ education benefits. Married taxpayers filing separately and those claimed as dependents on another return don’t qualify.

Additional exceptions might apply to the aforementioned tax breaks, and other educational tax benefits exist for Qualified Tuition Programs, student loan cancellations and repayment assistance, Coverdell Education Savings Accounts, education savings bonds, employer-provided educational assistance and work-related education. Learn more about all education tax benefits in Publication 970 at www.irs.gov.

You can also use TaxACT’s College Tax Whiz, a free interactive tool (at www.taxact.com/college-tax-whiz) that breaks down 10 college tax benefits.

– Courtesy of ARA Content