Congratulations, parents, you survived childhood! From diapers to diplomas, you've seen it all. But as the saying goes, "You ain't seen nothing yet!"

Your baby is now ready to go off to college and take another giant step towards adulthood. What does this mean to you other than one less mouth in the house and a lot less laundry? Paying for college! You didn't think you were getting off that easy, did you? According to the College Board, a "moderate" budget for a private college is about $49,000 annually. Maybe your kid is one of the lucky ones who received a scholarship or financial aid and the impact is less damaging to your wallet. However, most parents of college students are usually going to have to shell out at least some out-of pocket expenses for their child's higher education.

The IRS recognizes this and has a few items in the tax code that can be utilized on your return to (somewhat) soften the financial blow. There are deductions to your Adjusted Gross Income (tuition and fees, and student loan Interest among them) that lower your taxable income. Credits, on the other hand, reduce the amount of your tax liability dollar for dollar. The American Opportunity Credit and the Lifetime Learning Credit are two such credits. If you, your spouse or any dependent claimed on your tax return is eligible for one of these credits, you can claim them on your return and reduce your tax liability.

While this can feel like just a drop in the bucket compared with the overall expense of a college education, every little bit can help when it comes to tax relief.

American Opportunity Credit

The American Opportunity Credit (AOC) gives you the most bang for your buck, credit wise. For each eligible student, you can receive up to $2,500 off your tax bill. This includes 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000. Up to 40% of this credit can be refundable. So, for the maximum amount of $4,000 of qualified expenses, $1,500 of this is a nonrefundable credit, which means it can reduce your tax to nothing but whatever isn't used disappears into the ether. While the first $1,500 eliminates your tax liability, you can receive up to $1,000 as a refund, as if you had withheld the money from your paycheck.

The requirements for the AOC are quite specific. Your Modified Adjusted Gross Income can't be more than $180,000 (Married Filing Jointly) or $90,000 if Single, Head of Household or Qualifying Widow(er). The credit gradually phases out between $160,000 and $180,000 ($80,000 to $90,000 for Single, Head of Household or Qualifying Widow(er)) and you cannot claim the credit if your status is Married Filing Separate. These rules prevent wealthier taxpayers from circumventing the limitation by having their child claim the credit themselves or file separately to allow one of the parents to claim the student's expenses.

It doesn't matter who pays the college bills, the person claiming the student as a dependent is the only one who can claim the AOC. So, if Grandma is generously paying for the college expenses, she doesn't get to claim the AOC on her tax return. The parents, who have provided over half of his or her support, are the only ones eligible to claim the AOC. Even if your child is paying for college expenses himself, if you are claiming the student as a dependent, you are the only one who can claim the credit. If someone else (a relative or former spouse, for example) pays any amount of tuition to the institution directly, those expenses are considered paid by you if you are claiming the student as a dependent.

Lifetime Learning Credit

The Lifetime Learning Credit is like the American Opportunity Credit in only a few ways, but it is a non-refundable credit that can reduce your tax liability to $0. It can be worth up to $2,000 per tax return.

Unlike the AOC, the Lifetime learning credit can be for any year of post-secondary education. It isn't limited to the first four years of secondary education. Any courses taken, whether towards a degree or not, can be claimed. Thus, the name Lifetime Learning.

The amount of the credit is 20% of the total expenses for a maximum credit of $2,000 per tax return. So, if you, your spouse and one of your dependents each claim this credit, the maximum amount of qualified expenses you can claim is $10,000. The maximum AGI for this credit is slightly lower, $131,000 for Married Filing Jointly and $65,000 for single, head of household or qualifying widow(er) with a phase-out between $111,000 and $131,000 and $55,000 to $65,000 for other filing statuses, except Married Filing Separate, which is not eligible.

Differences Between the Two

The AOC is available for the first four years of post-secondary education only. The student must be enrolled at least a half-time for part of five months of the calendar year and be working towards a degree or other recognized credential, while the LLC has no time limit and there are no qualifiers to complete a degree or program. The AOC requires that a student must not have a felony conviction for a drug-related offense; this is not an issue with the LLC.

Claiming the Credit

To claim either of these credits, you must be a student at a qualified educational institution, which includes any school eligible to participate in the U.S. Department of Education student aid program. Online colleges that don't have accreditation do not qualify. The college or university will usually supply a Form 1098-T, which has the total amount of Qualifying Expenses (billed or paid) and has the amount of scholarships or other financial assistance received by the college or university. This is important because you must reduce the amount of expenses by scholarship amounts or you could claim expenses you don't have.

As always, a tax pro can help you navigate this maze and keep more money in your own pocket. Your college kids are going to need it!

Published on: Aug 7, 2017
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.