Education Tax Credits: The Lifetime Learning Tax Credit Explained

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It is time to file your taxes! While most people dislike filing their tax return, all people like receiving a tax refund. The sooner you file your taxes, the sooner you get a potential tax refund! If you are eligible for a tax refund, that means you overpaid/over-withheld taxes during the tax year. In other words, your actual tax liability is less than the estimated tax you paid during the year. In order to properly calculate your actual tax liability at year end, you must remember to claim all your eligible tax deductions and tax credits on your tax return. Doing so will decrease your taxable income and taxes owed.

A tax credit is a tax break for qualified taxpayers that reduces dollar for dollar the amount of tax you owe. Therefore, tax credits have a more significant impact on your tax liability than tax deductions. Below, I will detail the Lifetime Learning Tax Credit. Find out if you qualify for the educational tax credit!

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What is the Lifetime learning tax credit?

The Lifetime learning tax credit is a credit for qualified education expenses during the year. The education expenses must be paid for or on behalf of an eligible student enrolled in an eligible academic institution during the tax year. Unlike the American opportunity tax credit (Link: The American Opportunity Tax Credit Explained), the Lifetime learning tax credit is less restrictive in that the tax credit applies to undergraduates, graduates, and more. Additionally, the Lifetime learning tax credit does not have a limit on the number of years you can claim the tax credit on your tax return. The Lifetime learning tax credit allows you to claim a maximum tax credit of $2,000 per eligible student per year.

The Lifetime learning tax credit does phase-out based on income limits. The following are the income threshold amounts to claim the LLC:
  • Full Credit: Modified Adjusted Gross Income (MAGI) is $58,000 or less
  • Reduced Credit: MAGI is between $58,000 and $68,000
  • No Credit: MAGI is greater than $68,000
* The following income limits apply to single filers. If MFJ, the income limits are simply doubled.

Who is an eligible student for the Lifetime learning tax credit?

To be eligible for the Lifetime learning tax credit, you must meet several criteria. To begin, you must be a student enrolled or taking courses at an eligible educational institution. It is not a requirement of the Lifetime learning tax credit to be pursuing a degree or other educational credential. You are also eligible for the tax credit if your are taking the educational courses to improve job skills. Additionally, you must be attending the university or other educational institution for at least one academic period during the tax year. An academic period can be a semester, trimester, or quarter (as determined by the school). Lastly, the credit is available for an unlimited amount of years.

Below is a summary of the LLC eligibility requirements:

  • Be enrolled and taking courses at an eligible educational institution
  • Pursuing a degree, educational credential, or job/skill improvement
  • Enrolled for one academic period at an eligible educational institution

What are qualifying expenses for the Lifetime learning tax credit?

The Lifetime learning tax credit includes qualified expenses paid to an eligible educational institution. Eligible educational institutions include universities, colleges, and other post-secondary schools that meet the requirements. Check with your school if you are unsure.

Qualified expenses include tuition and fees paid to the eligible school. Additionally, any expenses mandated by the school program may also be considered qualified expenses. These additional qualified expenses may include the cost of textbooks, online software, supplies, and equipment. It is important to note that the supplies must be required for enrollment to be eligible for the tax credit.

Qualified expenses under the Lifetime learning tax credit do not include the costs of room and board, transportation, and school-required medical insurance.

Lastly, the IRS does not allow you to include amounts you receive from tax-free scholarships, federal Pell grants, employer-sponsored tuition grants, school refunds, and other non-taxable assistance (not including gifts and inheritances). You can only include in qualified expenses the amount you actually paid rather than the listed price of attendance. For example, if your university tuition costs $10,000 per year, and you receive a $2,000 merit-aid scholarship, y
ou can claim qualified expenses of $8,000 relating to your tuition costs.

How to calculate the Lifetime learning tax credit?

As stated, the maximum credit for the Lifetime learning tax credit is $2,000 per student. The tax credit is calculated based on the following:
  • 20% of up to $10,000 of qualified expenses
For example, if you have $6,000 in qualified expenses during the year, you will calculate the LLC as follows:
  • 20% of $6,000 = $1,200
The calculation equals $1,200. Therefore, you may claim a tax credit of $1,200 on your tax return.

Unlike the AOTC, the LLC is not a refundable tax credit. If the tax credit decreases your tax liability to zero, you may not claim any of the remaining tax credit as a refundable credit amount. In other words, you cannot have the excess credit amount refunded to you. 

How to claim the Lifetime learning tax credit? 

To claim the Lifetime learning tax credit, you must receive a Form 1098-T, which is a tuition statement provided by your school. If you do not receive the Form 1098-T by January 31, reach out to your educational institution. The 1098-T serves as support for your qualified tuition, fees, and scholarship.

Use the information on the Form 1098-T to complete the Form 8863, which you will attach to your Form 1040 tax return.

The federal tax credits available to taxpayers represent a major tax savings opportunity. Taxpayers should know and understand the tax credits available to them to save money and increase their 2019 tax refund. Please share the post with others to help them learn about the Lifetime learning tax credit. Additionally, please comment below or connect with me on social media if you have any questions relating to the Lifetime learning tax credit.