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What Is It?

Definition

The Lifetime Learning credit is an education tax credit that covers a maximum $2,000 of your, your spouse's, or your dependent's qualified tuition and related expenses for any given year. However, even if more than one family member qualifies for the credit in a given year, the credit is still limited to a total of $2,000 per tax return per year. The Lifetime Learning credit is calculated as 20 percent of the first $10,000 of a student's qualified tuition and related expenses for the year. The credit can't be more than your tax liability for the year (i.e., it is a nonrefundable credit).

As the name implies, the Lifetime Learning credit is intended for use over a student's lifetime; it is not limited to a certain number of years. A student need not attend school at least half-time to be eligible for the credit. Adults who take occasional refresher courses can be eligible, even if those courses do not lead to a degree. This is in contrast to the American Opportunity credit (formerly the Hope credit), for which you must be enrolled at least half-time in a program leading to a degree to qualify for the credit.

Example(s): Judy takes some continuing education classes to learn various software programs that will help her in her legal practice. She enrolls in classes at College X, an eligible educational institution, and pays $4,000 in tuition. She can take a Lifetime Learning credit of $800 (20 percent of $4,000) for that year. She cannot take the American Opportunity credit because she is not enrolled at least half-time in a degree or certificate program.

Tip: A credit is a dollar-for-dollar reduction against taxes owed and is therefore more valuable than a tax deduction of the same amount.

Requirements

In order to take the Lifetime Learning credit, you must meet the following requirements:

  • The expenses must be incurred at an eligible educational institution, which is generally an accredited post-secondary institution that offers a degree program and is eligible to participate in federal student aid programs.
  • The credit covers only qualified tuition and related expenses (no room and board).
  • In 2020, the full credit is limited to single filers with a modified adjusted gross income (MAGI) below $59,000 and joint filers with a MAGI below $118,000. A partial credit is available for single filers with a MAGI between $59,000 and $69,000 and joint filers with a MAGI between $118,000 and $138,000. To calculate the amount of your credit if you’re MAGI falls within the phaseout range, see Questions & Answers.
  • If you are married, you must file a joint return.

How Does It Work?

Two general rules govern the operation of the Lifetime Learning credit:

  • The Lifetime Learning credit is limited to a maximum credit of $2,000 per tax return per year, regardless of the number of people in your household who qualify for the credit in that year.

Example: Dad takes several accounting courses at the local community college. The total tuition for these courses is $1,500. That same year, Mom also enrolls for an education degree. Her tuition for the year is $12,000. Dad's Lifetime Learning credit is worth $300 (20 percent of $1,500) and Mom's Lifetime Learning credit is worth $2,000 (20 percent of a maximum $10,000 qualified tuition and fees). Because the Lifetime Learning credit is limited to $2,000 per tax return, however, Mom and Dad cannot claim a $2,300 credit; they are limited to $2,000.

  • The Lifetime Learning credit cannot be taken in the same year as the American Opportunity tax credit (a maximum $2,500 tax credit per student per year for the first four years of a student's post-secondary education) on behalf of the same student.

For an example of the interaction between the Lifetime Learning credit and the American Opportunity tax credit, see

Questions & Answers.

Strengths

Is Available to Students Enrolled on Less than Half-Time Basis

Unlike the American Opportunity credit, the Lifetime Learning credit is available to students who are enrolled in courses on less than a half-time basis. Further, the courses are not required to lead to a degree.

Is Not Limited to Certain Number of Years

The purpose of the Lifetime Learning credit, as the name implies, is to encourage lifetime learning and be available throughout a student's lifetime. By contrast, the American Opportunity credit is limited to a student's first two years of post-secondary education (college).

Credit Available In Same Year as Tax-Free Distribution from Coverdell Education Savings Account

You can claim the Lifetime Learning credit in the same year that you receive a tax-free distribution from your Coverdell ESA. The only catch is that the education expenses you intend to cover with your Coverdell ESA funds cannot be the same expenses used to qualify for the credit.

Tradeoffs

Ability to Take Credit Depends on Income

In 2020, the full credit is limited to single filers with a modified adjusted gross income (MAGI) below $59,000 and joint filers with a MAGI below $118,000. A partial credit is available for single filers with a MAGI between $59,000 and $69,000 and joint filers with a MAGI between $118,000 and $138,000.

Is Limited to $2,000 per Tax Return per Year, Regardless of the Number of Qualified Students in A Family in a Given Year

If Mom and Junior both qualify for a $2,000 Lifetime Learning credit in a given year based on their respective courses, the family is limited to a $2,000 credit per tax return.

Cannot Be Used For Room-And-Board Expenses

The Lifetime Learning credit covers only qualified tuition and related expenses.

Cannot Be Taken In Same Year as American Opportunity Credit for the Same Student

You can claim either the Lifetime Learning credit or the American Opportunity credit in a given year for the same student, but not both. For a discussion of which credits to choose when both apply to a particular student, see Questions & Answers below.

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How to Do It

If you paid qualified higher education expenses, you'll receive a 1098-T form from the college as a reminder that you may qualify. You then have to file Form 8863 with your federal income tax return to get the Lifetime Learning credit.

Questions & Answers

Can You Claim The Lifetime Learning Credit For College Expenses Your Child Has Paid?

Yes, as long as you claim your child as a dependent on your tax return. If you do, any qualified tuition and related expenses that your child pays are considered paid by you for the purposes of the Lifetime Learning credit.

Can A Student Claim The Lifetime Learning Credit on His or Her Own Tax Return?

It depends. If the student is claimed as a dependent by his or her parents, then the student cannot take the Lifetime Learning credit for that tax year on his or her own tax return. If the student is not claimed as a dependent on anyone else's tax return, however, the student can claim the credit on his or her own tax return.

How Do You Calculate the Lifetime Learning Credit If You’re Modified Adjusted Gross Income Falls within the Income Phaseout Range?

In 2020, the Lifetime Learning credit is phased out for single filers with a MAGI between $59,000 and $69,000 and joint filers with a MAGI between $118,000 and $138,000.

Example: Ted and Mary file a joint tax return and have one child in college in 2020. Assume Ted and Mary's combined MAGI for the year is $122,000; thus, they are $4,000 into the $20,000 phaseout range for joint filers ($122,000 minus $118,000). To calculate the available Lifetime Learning credit, multiply the maximum credit available ($2,000) by the fraction of the phaseout range remaining ($16,000/$20,000 =.8). The result is that Ted and Mary will be able to take a Lifetime Learning credit of $1,600 in 2020.

How Do You Decide Whether to Take The American Opportunity Tax Credit or The Lifetime Learning Credit for Your Child's College Expenses?

Unfortunately, both the Lifetime Learning credit and the American Opportunity tax credit cannot be claimed in the same year for the same student, so you'll need to pick one. The Lifetime Learning credit is a maximum $2,000 credit allowed per year for college expenses, while the American Opportunity tax credit is a maximum $2,500 credit per student per year, so all other things beings equal, the American Opportunity credit is the better deal.

The American Opportunity credit has higher income limits to qualify and can be taken for multiple students in the same year, provided each student qualifies independently (by contrast, the Lifetime Learning credit is limited to $2,000 per tax return, not per student). But if a student is enrolled less than half-time or has already gone through four years of college, the Lifetime Learning credit is the only option because the American Opportunity credit is limited to students attending their first four years of college on at least a half-time basis.

Does The Lifetime Learning Credit Affect The Alternative Minimum Tax That a Taxpayer May Owe?

The Lifetime Learning credit will not reduce alternative minimum tax.

Are There Circumstances for Which Your Qualified Tuition and Related Expenses Must Be Reduced For Purposes of the Lifetime Learning Credit?

Yes. Because the amount of qualified tuition and related expenses for the purposes of the Lifetime Learning credit must be actual out-of-pocket costs, any such expenses for the tax year must be reduced by amounts paid for the benefit of the student. Such amounts may include employer-sponsored educational assistance, any income earned by U.S. savings bonds used to pay college expenses, distributions from a Coverdell ESA, and any scholarships the student obtains.

Also, there are instances when all or part of the Lifetime Learning credit you have taken in a given year may need to be repaid pursuant to recapture rules. According to the IRS, if, after you file the current year's tax return, you receive tax-free educational assistance for, or a refund of, an educational expense that you used to figure the Lifetime Learning credit on your tax return, you must recalculate your Lifetime Learning credit as if the assistance or refund had been received in the current year. For more information on how and where to report the repayment (recapture), see the instructions for your federal tax forms.

Is The Lifetime Learning Credit Available Only In The Tax Year The Educational Expenses Are Paid?

Yes, the Lifetime Learning credit is available in the tax year the expenses are paid, as long as the education begins during that year or in the first three months of the following year.

Example: In December of Year 1, Bob pays qualified tuition and related expenses to College Z for the second semester of his freshman year, which begins on January 15 in Year 2. Bob's parents may be able to claim the Lifetime Learning credit on their Year 1 tax return for the December payment made in Year 1, because the education that is the subject of the payment begins during the first three months of the following year. If Bob had paid the expenses in January of Year 2 instead of December of Year 1, his parents could take the Lifetime Learning credit in Year 2 (assuming they are eligible).

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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