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Understanding the Lifetime Learning Tax Credit (For Students and Families)
What is it?
The Lifetime Learning Tax Credit provides a federal income tax credit based on the first $10,000 in postsecondary education expenses paid by the taxpayer during the tax year. A tax credit is subtracted from the taxes a family owes, instead of reducing taxable income like a tax deduction. The Lifetime Learning Tax Credit does not vary according to the number of students from a household. This is in contrast with the Hope Scholarship, which is based on the number of eligible students in the household. If there are multiple children from the same household in school at the same time and the tuition bills total more than $10,000, the credit is only given for the first $10,000 paid.
What is the amount?
The Lifetime Learning Tax Credit provides a tax credit of up to $2,000 per taxpayer for education expenses. The amount of the credit is equal to 20% of the first $10,000 of qualified tuition and related expenses paid by the taxpayer. (In 2006 the maximum lifetime learning tax credit was increased to $4,000 and 40% for Gulf Opportunity Zone Students.)
Unlike the Hope Scholarship, the Lifetime Learning tax credit may be claimed for an unlimited number of years.
Who qualifies?
An eligible taxpayer must file a federal tax return and owe taxes to claim the credit. In addition, the taxpayer must claim an eligible student as a dependent on the tax return, unless the credit is for the taxpayer or the taxpayer's spouse. (This means the eligible taxpayer may also be the eligible student.) The credit has an income phaseout. For 2010, the phaseout amounts were $50,000 to $60,000 (single filers) and $100,000 to $120,000 (married filing jointly). The 2011 phaseout amounts will be adjusted for inflation.
Qualified tuition and related expenses includes expenses for any course of instruction at an eligible educational institution to acquire or improve job skills. This means that the credit may be used for part-time study, not just for students enrolled at least half-time in a degree program.
Qualified higher education expenses include tuition and fees. Non-academic fees such as student activity fees, athletic fees and insurance are excluded. The expenses must be related to the student's academic course of instruction. Expenses related to sports, games or hobbies are excluded unless they are part of the student's degree program.
The expenses must have been paid by the taxpayer or by the student, and the taxpayer must list the student as an exemption on their income tax return. (Any qualified tuition and related expenses paid by the dependent are treated as though they were paid by the taxpayer, per 26 CFR 25A(g)(3).)
Scholarships and financial aid do not count as qualified tuition and related expenses paid by the taxpayer. Only out-of-pocket expenses count. Gifts, bequests and inheritances do count as though paid by the taxpayer.
How is it obtained?
To obtain the credit, the taxpayer must report the amount of tuition and fees paid as well as the amount of certain scholarships, grants and untaxed income used to pay the tuition and fees. The law states that schools must send this information in the form of a statement to each taxpayer and to the IRS. The school sends out these statements (Form 1098T) through a third party (ECSI) each January for the preceding tax year. The information on the 1098T, as well as your personal records about tuition and fee amounts paid, are used to fill out the IRS Form 8863 to claim the tax credit.
Can a family claim multiple benefits?
A family may claim a Hope credit, a Lifetime Learning credit and an exclusion from gross income for certain distributions from qualified state tuition programs or education IRAs as long as the same student is not used as the basis for each credit or exclusion AND the family does not exceed the Lifetime Learning maximum per family.
What about further questions?
Please note that Geneva College cannot provide tax advice. Please contact a tax professional or the IRS with additional questions.