Lifetime Learning Tax Credit

What is the lifetime learning tax credit?

The Lifetime Learning Credit is a tax credit designed by the government to promote higher education by rewarding students at tax time for spending money on tuition and fees at an accredited post-secondary institution. But who qualifies for one of these credits? What expenses count toward it? And what exactly is an "accredited post-secondary institution," anyway? Let's take a look.


The Lifetime Learning Credit is made available to anybody who has paid qualified expenses toward the higher education of a qualifying student. It allows up to $2,000 to be applied toward your tax liability, based on a calculation of 20% of the first $10,000 in expenses.


In order to qualify, you must have paid the expenses either for yourself, your spouse, or your dependent who is a qualifying student. This means if you are a grad student who has taken out loans to pay for school, you qualify. If your daughter is a freshman in college, and you paid her tuition, you qualify. If you are in your last year of a vocational school, and you pay your tuition, and nobody else claims you on a tax return as a dependent, you qualify. If you paid for your niece, however, and she is not a dependent, you do not qualify to take the Lifetime Learning Credit.

Other qualifications you must fulfill before taking the credit: you must be a U.S. resident or resident alien (your spouse as well, if married filing jointly); you must be either single, head of household, or married filing jointly; you can't be claimed as a dependent on somebody's else's return; your income must be less than $52,000 if single or $105,000 if married filing jointly; and you must have a tax liability.

To be a qualifying student, you, your spouse, or your dependent must have taken a minimum of one course at a qualifying institution. In this case, the government defines a qualifying institution as any post-secondary, accredited school. This would include colleges, universities, and vocational and technical schools. The key to the definition is whether or not the school is eligible to participate in federal student financial aid programs. If so, then the school qualifies.


For the most part, tuition and fees paid as a requirement for enrollment at a qualifying institution make up qualifying expenses for the Lifetime Learning Credit. This can include such things as supplies or equipment, but only if it is required by the school in order to attend. If, for example, you attend a music school and they require you to own an instrument to attend, you can apply this toward the credit. Otherwise, things like your son's new laptop or your books for the semester don't count. Other expenses which do not qualify include transportation costs, even if they are required to get to the school in the first place (such as plane fare or car expenses); insurance (even though it may be required for attendance); or room and board.

Another important factor to consider when looking at expenses with the Lifetime Learning Credit, is that the IRS does not allow what they term a "double benefit." This means if you are using these expenses in any other way on your tax return - as a business expense, for example, or with another education credit such as the Hope Credit - you cannot take the credit. You also cannot take the credit if you used tax-free money from a plan such as a Coverdell ESA to pay for the bills, or received tax-free scholarships or grants to pay for the tuition.


If you qualify to take the credit, you will need to get Form 1098-T from your institution. This lists the total tuition and fees you paid to that school during the year. You will then file Form 8863. The credit is 20% of the first ten thousand dollars you spend on qualifying expenses, up to a maximum of $2,000 for the entire return. However, the credit is limited by your income: if your modified AGI is between $42,000 and $52,000 if single, or between $85,000 and $105,000 if married filing jointly, the credit is gradually reduced. Anything above those limits disqualifies you.

For example, suppose you paid $18,000 in qualifying tuition and fees for your master's program. You are single, and your AGI for the year was $39,000. You are below the AGI limit, so you will not have a reduction in the credit. To figure the credit, multiply the total you spent up to $10,000 by 20%. This equals $2,000, which would be your credit.

Now suppose that you and your spouse paid $18,000 each for both of your children in school. Even though there are two children, only the first $10,000 you spent total qualifies for the credit. In this case, the calculation would be the same, and the total credit would be $2,000, the maximum allowed under the law.

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