- A lifetime learning credit (LLC) is a way to reduce your tax bill dollar-per-dollar. You can save up to 20% on the first $10,000 of qualified expenses, which equals $2,000 a year.
- An LLC can be claimed for any post-secondary education taken by yourself, your spouse, or your dependent. However, only one LLC is allowed per tax return.
- Another education credit is the American Opportunity Tax Credit (AOTC). While only available for the first four years of post-secondary education, it offers a higher credit amount and is a great option.
Learning something new comes with a lot of obvious benefits — an expanded skill set, a boost in confidence, exposure to different ideas and industries. It also comes with less obvious benefits, one of which is being able to file for a tax credit.
The federal government offers a specific tax credit to those who have paid any higher education expenses — it’s called a lifetime learning credit. So if you or your immediate family members are currently enrolled in college or continuing education, read on. The lifetime learning credit can likely save you thousands of dollars a year.
What Is the Lifetime Learning Credit?
The lifetime learning credit (LLC) is a tax credit intended to help offset the expenses incurred by pursuing higher education. It applies to most forms of post-secondary education, such as undergraduate, graduate, and professional degree courses. The credit also extends to both part-time and full-time attendance.
Even if the course doesn’t lead to a degree — for instance, it may be toward a new job skill or other recognized credential — an LLC could still be claimed.
The LLC is worth up to $2,000 per tax return, regardless of the number of students. However, there is no limit on the number of years’ tax returns that you claim the credit. As long as you’re continuing your education and meeting the criteria, you are eligible for an LLC.
What Is a Tax Credit?
So why would you want a tax credit? Tax credits reduce the income tax you have to pay for the year. Granted by the government as a way to encourage specific behavior (i.e., retirement saver’s credit, adoption credit), tax credits are a straight dollar-per-dollar deduction on the total amount owed.
There are two types of tax credit. One is a refundable tax credit, which is first used to pay your taxes, with any excess credit going back to you. Examples include earned income tax credits for low-income workers and premium tax credits for federal health insurance premiums.
The second type is a nonrefundable tax credit, which only goes toward your taxes. Any excess goes back to the IRS. Most tax credits fall under this type, including lifetime learning credits.
To illustrate, say your federal taxes for the year are $1,000. If your refundable tax credit is $2,000, $1,000 would go to paying taxes and $1,000 would be refunded back to you. If you had a nonrefundable tax credit of $2,000, your taxes would be fully paid, but you wouldn’t receive any remaining balance.
It’s important not to confuse tax credits with tax deductions. While credits reduce taxes directly, deductions only reduce taxable income. Certain expenses, such as charitable donations, health care payments, or home mortgages, are tax deductible. This means you can deduct them from your year’s income and use the lower figure to calculate your taxes.
Higher education expenses are eligible as both a tax credit and tax deduction. Keep in mind, you can only claim one education tax benefit per year, so choose wisely. In most cases, a tax credit offers considerably more savings. It’s also a direct deduction and much easier to calculate when doing your taxes. Even if LLCs are nonrefundable, they may be the best choice when it comes to saving on education costs, unless you also qualify for the American Opportunity Tax Credit (more on this below).
How Much Is Covered By an LLC?
To be able to claim a lifetime learning credit, the expense has to be considered a qualified education expense. This is typically anything required to enroll or attend the course. The most common qualified education expenses are tuition, registration fees, requisite books and supplies, or other mandatory activities and supplies.
Not covered are supplemental items, such as room and board, medical fees, transportation, and the like. Extracurricular activities or non-credit classes, unless necessary to the course, usually aren’t a qualified education expense either. For instance, if your professor recommends a textbook, but you can still enroll in the class without purchasing one, the textbook can’t be claimed as a qualified education expense.
The expense must be also paid for an academic period that starts during the current tax year or the first three months of the following tax year. Furthermore, using tax-free funds or tax-free educational assistance (i.e., grants, scholarships) disqualifies the expense from receiving a tax credit.
Once you’ve tallied your qualified education expenses, you can calculate the amount of credit you’re eligible to claim. The maximum amount is 20% of the first $10,000 of qualified education expenses per year — or a maximum of $2,000 credit per tax return.
For example, if you paid $5,000 in qualified education expenses, your credit would be $1,000. If you paid $10,000 or more, your credit would be the maximum of $2,000.
Who Can Claim an LLC?
You don’t necessarily have to be the one studying or even paying for the qualified education expenses to claim an LLC. To be eligible, you have to meet the following requirements:
- You, your dependent, or a third party pay qualified education expenses for higher education.
- You, your dependent, or a third party pay education expenses for an eligible student enrolled at an eligible educational institution (a list is provided here).
- The eligible student is yourself, your spouse, or a dependent listed on your tax return.
You are ineligible for an LLC if any of the following are true:
- You are paying for someone who isn’t listed as a dependent on your tax return.
- You are listed as a dependent on someone else’s tax return.
- Your filing status is married filing separately.
- You already claimed or deducted another higher education benefit.
- You were or your spouse was a non-resident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes.
Additionally, the credit you receive depends on your modified adjusted gross income (MAGI). If your MAGI is between $57,000-67,000 for single filing status (or $114,000-134,000 for joint filing status), your credit is gradually reduced or phased out (the maximum amount may no longer be $2,000). If your MAGI is $67,000 or more ($134,000 or more for joint filing status), you can’t claim an LLC.
To clear up any confusion, the IRS provides a helpful tool to verify if you’re eligible for a lifetime learning credit.
LLC vs. Other Forms of Education Funding
Aside from an LLC, the government offers another type of education credit called the American Opportunity Tax Credit (AOTC). The AOTC offers a higher credit of $2,500 per eligible student and is refundable, which means you can get up $1,000 in refunds once your taxes are paid.
The AOTC also has the advantage of accommodating higher income thresholds. Your MAGI can be up to $80,000 to claim the full AOTC. If your MAGI is between $80,000-90,000 (or $160,000-180,000 for joint filing status), your credit starts to gradually reduce and phase out. If your MAGI is $90,000 or more ($180,000 or more for joint filing status), you can’t claim an AOTC.
However, the AOTC does come with stricter guidelines. It’s only available for the first four years of higher education, and must be toward a degree or other recognized education credential. The student must also be enrolled at least half time for at least one academic period beginning in the tax year but not have finished the first four years of higher education at the beginning of the tax year.
Furthermore, the student must not have claimed the AOTC or former Hope credit for more than four tax years. They also must not have a felony drug conviction at the end of the tax year.
As such, if your expenses are toward continuing education or vocational studies, an LLC may be a better choice. Although the maximum credit is $2,000 and nonrefundable, it has fewer restrictions and can be claimed an unlimited number of years.
To help you decide which one is right for you, the IRS provides a clear comparison between an American Opportunity Tax Credit and a Lifetime Learning Credit.
Alternatively, the government has also set up a program to help with future education expenses. Referred to as a qualified tuition program or 529 Plan (named after Section 529 of the IRS Tax Code), it’s a special savings account that offers a number of tax and financial aid benefits.
A 529 Plan allows you to establish an account to contribute toward the education expenses of a designated beneficiary (the student). You can even open an account with yourself as the beneficiary.
The main benefit of a 529 Plan is that all earnings and withdrawals for qualified education expenses are completely tax-free. Plus, with each plan maintained by different states and state agencies, some may offer more tax deductions or credits.
In contrast to education credits, a 529 Plan can cover more than just required course fees. It can also be used for room and board, books, equipment, computer software, and even internet costs.
Note that all withdrawals must go toward a qualified education expense. If not, the amount will incur income tax and a 10% penalty tax.
A 529 Plan is a simple way to save for education. However, the best scenario would be to combine a 529 Plan with an AOTC or LLC. Just make sure you apply the appropriate benefit for the expense — either use the expense to claim a tax credit or pay it using a withdrawn amount from a 529 Plan.
For example, you can use funds from your checking account toward tuition and other required purchases to qualify for the LLC. Then you can use a 529 Plan to pay for supplies, internet, room, and board. Additionally, you can apply for a government-subsidized student loan to further help with education expenses.
Required Paperwork To Claim an LLC
In order to be eligible for a lifetime learning credit, you must have Form 1098-T (Tuition Statement) from an eligible education institution. The form outlines all payments made during the year and is usually sent out by Jan. 31.
Upon receipt, verify that all information is correct. If you don’t receive the form or notice any errors, contact the institution immediately. It’s important to have Form 1098-T, as it contains the information necessary to claim education credits.
Use the information to complete Form 8863 (Education Credits) and attach it to Form 1040 or Form 1040A (U.S. Individual Income Tax Return). Send both forms when filing your annual income tax. Congratulations, you’re on your way to receiving your first education credit.
Give Credit Where It’s Due
Higher education provides both practical and personal benefits, which are further encouraged by the government through tax credits. Not only can you claim expenses for your own education, you can also claim those spent on behalf of a spouse or dependent.
You can only claim one education credit per student per tax year, so it’s important to know which one works best for you. An American Opportunity Tax Credit is generally recommended for anyone taking their first four years of post-secondary studies as it offers a higher amount of credit. Although limited to one credit per tax return, lifetime learning credits can be claimed for most other forms of education — whether post-secondary or post-graduate — no matter how many years the individual has studied.
In addition to these credits, there are other ways to ease the pressure of education payments — bank plans, student loans including unsubsidized loans, and the like. With the right combination, you’ll be able to optimize your funding sources and further your education in a way that makes financial sense for you.
