If you’ve paid for tuition or other college costs in the past year, you could qualify for the Lifetime Learning Credit.
As its name suggests, the Lifetime Learning Credit is available at any age. You or your child could claim this $2,000 tax credit for college, graduate school, or vocational school.
The Lifetime Learning tax credit reduces the financial burden for qualifying educational expenses. Read on to see how this college tax credit works and how to qualify.
What is the Lifetime Learning Credit?
The IRS offers the Lifetime Learning Credit to offset the costs of education. If you or your dependent paid educational expenses in the past year, then one of you can claim this tax credit.
The Lifetime Learning tax credit reduces your tax liability by up to 20 percent of the first $10,000 you paid in educational costs. That means your federal income tax could be reduced by a maximum of $2,000 per year.
However, the Lifetime Learning Credit does not offer any refunds. If you owe $0 in taxes, then you won’t get any money back. If you owe $1,500 in taxes, you won’t get the remaining $500 in cash.
Similarly, you won’t get the credit if you’re already getting a refund on your taxes. That doesn’t mean you should change your withholding status to create a tax liability, though. The Lifetime Learning Credit typically isn’t worth changing your tax status to get it.
Who’s eligible for the Lifetime Learning Credit?
Anyone paying eligible educational expenses can qualify for this college tax credit. This includes parents and students alike. However, only one person can claim the credit in a given year.
Furthermore, parents can’t claim the tax credit for more than one dependent. Even if you have two or three kids in college, you can only claim one Lifetime Learning tax credit for a maximum of $2,000 per year.
A final eligibility requirement has to do with your income. Your modified adjusted gross income (MAGI) can’t exceed $65,000 as a single filer or $130,000 if you’re married filing jointly. If you make more money, then you won’t qualify for this college tax credit.
What educational expenses qualify for the LLC?
Before claiming this college tax credit, make sure your educational expenses qualify. To be eligible, your expenses must go straight to the school and be mandatory for enrollment and attendance.
Plus, you must pay out of your own pocket, whether from your income or student loans. Scholarships, grants, and financial aid money don’t count.
The money you spend for student activities, books, equipment, or materials also may not qualify. That’s because most materials aren’t technically required — but good luck getting through college without them.
You can’t double up with the Lifetime Learning Credit
The main restriction of the Lifetime Learning Tax Credit is that you can’t claim it at the same time as other educational tax breaks and deductions.
Let’s say you deduct educational expenses on your income tax return as a business expense. You can’t then claim those same expenses for the Lifetime Learning Credit. Similarly, you can’t simultaneously claim a tuition deduction with the Lifetime Learning tax credit.
There are also restrictions on money from a Coverdell savings account or 529 plan. Since you’re already getting some tax advantages here, you can’t double up with the Lifetime Learning Credit.
Finally, you can’t claim the American Opportunity Tax Credit at the same time as the Lifetime Learning Credit. Even if you qualify for both, you can only use one.
Lifetime Learning Credit vs. American Opportunity Tax Credit
In most cases, people who qualify for both the Lifetime Learning Credit and the American Opportunity Tax Credit should go with the latter. Why?
The American Opportunity Tax Credit usually puts more money in your pocket than the Lifetime Learning tax credit. In fact, you can claim up to $2,500 for each qualifying student with the American Opportunity Credit.
Plus, 40 percent of the American Opportunity Tax Credit could be refundable. As you read above, no part of the Lifetime Learning Credit is refundable. You either use it or lose it.
If you or your child is a college student, you should choose the American Opportunity Credit over the Lifetime Learning Credit. But if you or your dependent is in graduate school, then you’ll have to go with the Lifetime credit. That’s because the American Opportunity Credit only counts toward four years of college.
How to make the most of the Lifetime Learning tax credit
Anyone who has paid educational expenses over the past year could get a break with the Lifetime Learning Tax credit. Although there are strict income guidelines and rules, it’s worth exploring. Especially if that means you can reduce the amount you owe on taxes by up to $2,000.
Most online tax preparation services will check over all your options and pick the best one for your particular situation. These government offerings soften the blow of tuition costs and help you pay for your or your child’s college education.
Want to learn more about tax-advantaged savings accounts? Check out this guide on how to make the most of your 529 college savings plan.
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