When it comes to paying for college, it’s always a good idea to take advantage of any “free money” you can get. After all, college is expensive! After you’ve covered what you can with grants and scholarships, any amount that you pay out of pocket could qualify you for certain tax credits.
In this article, we discuss the Lifetime Learning Credit (LLC), how to tell if you qualify for it, and how to claim it on your taxes. We also compare it to the American Opportunity Tax Credit (AOTC), which can be used to lower your tax burden if you pay tuition expenses for yourself or a dependent in their first four years of college.
Brief Overview of the LLC
The LLC is a tax credit that first became available in the 1998 tax year. It is a credit for qualified tuition and related expenses paid toward courses at an undergraduate, graduate, or professional degree level.
Basically, how it works is that if you have to pay out of pocket for higher education expenses at a qualifying institution, that institution will mail you a form in January for the previous year summarizing what you paid. When you file your taxes, you will fill out a form recording this amount. You will then receive a credit for part of those expenses.
A tax credit is an amount of money taken off your total tax burden. For example, if you owe a total of $10,000 in federal taxes for the year, but qualify for a $1,000 credit, then the amount you owe is reduced to $9,000. If you’ve already paid more than this amount in taxes, then you will receive a refund for the difference.
However, this credit is not considered refundable if your tax burden was less than the credit amount. For example, if you only owe $1,000 in taxes but would otherwise qualify for a $2,000 credit, you will only get $1,000 off your tax burden and will not receive the other $1,000 of that credit.
Who Can Claim the LLC?
To claim the LLC on your taxes, you must meet all three of the following requirements:
- You, your dependent (such as a child you claim on your taxes), or someone else paid qualified education expenses for higher education.
- The qualified education expenses were paid on behalf of an eligible student enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse, or a dependent you listed on your tax return.
Basically, someone (who may or may not have been you) paid for education expenses for a student who is you, your spouse, or your dependent. If you are unsure if you meet these criteria, the IRS has an interactive app you can use called “Am I Eligible to Claim an Education Credit?” to check.
How to Tell If an Expense Is “Qualified” or a Student or Institution Is “Eligible”
The words “qualified” and “eligible” appear all over the criteria listed in the previous section. But just what is a “qualified” education expense, and what makes a student or institution “eligible”?
Qualified education expenses include any money you paid for tuition, enrollment fees, or any other expenses that you are required to pay. This includes any activity fees you are required to pay but does not include books, supplies, or equipment.
To be eligible, a student must meet the following criteria:
- They are taking courses at an eligible educational institution.
- The courses they are taking are to get a degree or another education credential or to get or improve job skills.
- They must be enrolled for at least one academic period (semester, trimester, or a quarter as determined by the school) beginning in the tax year.
Most schools qualify as an eligible education institution. They must offer higher education beyond high school and be eligible to participate in the federal student aid program. This includes most accredited public, nonprofit, and for-profit private institutions. You can check to see if your school is included by searching for it in the Database of Accredited Postsecondary Institutions and Programs.
How Much Is the LLC?
The amount of the credit is 20% of the first $10,000 of qualified education expenses. This comes out to a maximum of $2,000 per return. If there is more than one student in the family, this limit applies in total and not individually to each family member.
For example, if you paid $2,500 for classes for your job and also paid $5,000 toward your dependent child’s college, then you could get a credit in the amount of 20% of $2,500 + $5,000, or $1,500.
As another example, suppose you paid $12,000 in tuition expenses for your spouse and $15,000 in tuition expenses for your dependent child. You can only get 20% of the first $10,000 as a credit despite having two family members who both incurred more than that amount. So, you would be limited to the maximum $2,000 credit.
The nice thing about this credit is that there is no limit on the number of years you can use it. So, any year for which you have paid qualified expenses for a student listed on your tax return, you can use this credit.
What Are the Income Limits for the LLC?
You can only get this credit if your income is below a certain threshold. For the tax year 2019, the credit can be taken by anyone earning less than $58,000 if single or $116,000 if married and filing a joint return.
These numbers are based on your Modified Adjusted Gross Income (MAGI). For most people, your MAGI is the same as your Adjusted Gross Income (AGI), which is your total earned income minus allowable adjustments, such as retirement contributions, alimony payments, student loan interest, and so on. Your MAGI is determined by adding back foreign-earned income and housing exclusions.
If you earn between $58,000 and $68,000 ($116,000 and $136,000 if you file a joint return), the credit is gradually phased out. (If you earn over $68,000 or $136,000, respectively, you do not qualify.) The phaseout works as follows:
- If single, take the difference between your MAGI and $58,000 and divide by 10,000.
- If married filing jointly, take the difference between your MAGI and $116,000 and divide by 20,000.
- Multiply the decimal result by the amount of education credit you would have gotten if you made under the limits. This is the amount you qualify for.
How Do You Claim the Credit?
To claim the LLC, the law requires that you or a dependent have received one of the following:
- Form 1098-T (A tax form that most schools mail out by Jan. 31 each year that summarizes what you paid for the previous year)
- A Tuition Statement from the eligible institution
This statement or form will help you figure out your credit. To claim the LLC, you will need to complete Form 8863 and attach it to your Form 1040 or Form 1040-SR when you file your taxes.
Differences Between the LLC and AOTC
In addition to the LLC, there is another education credit called the American Opportunity Tax Credit (AOTC). If you qualify for it, the AOTC usually results in a larger credit.
The AOTC can only be used for the first four years of postsecondary education. The maximum amount of the credit is $2,500 per eligible student, as opposed to $2,000 per return for all students. The income limits for the AOTC are higher, and up to 40% is refundable (meaning that if the amount of the credit is more than your tax burden, you can still receive an additional 40% of the difference).
Note that you cannot claim both credits for the same student in the same year. However, you can claim the AOTC for each qualifying dependent student and then additionally claim the LLC for any other family member’s education expenses that did not qualify for the AOTC.
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