Lifetime Learning Credit: How to Save Money This Tax Season

 June 5, 2020
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If you’ve paid for tuition or other college costs in the past year, you could qualify for the Lifetime Learning Credit (LLC).

As its name suggests, the Lifetime Learning Credit is available at any age. College, university and trade school students can claim up to $2,000 with this tax credit. If you think you might be eligible, here are answers to key frequently asked questions about the program:

What is the Lifetime Learning Credit?

The IRS offers the Lifetime Learning Credit as one of its measures to offset the cost of an education. If you paid educational expenses in the past year for yourself, your spouse or your dependent, you can claim this tax credit.

The Lifetime Learning tax credit reduces your tax liability by up to 20% 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, you won’t get any money back.

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 independent students alike. However, only one person can claim the credit in a given year. If you’re claiming the Lifetime Learning Credit as a student, for instance, your parents cannot claim it for the same expenses.

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 of these credits. The maximum Lifetime Learning Credit is $2,000.

The final eligibility requirement has to do with your income. Your modified adjusted gross income (MAGI) can’t exceed $68,000 as a single filer or $136,000 if you’re married and filing jointly, per tax year. If you make more money, 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.

In addition, the money you spend on student activities, books, equipment or materials might not qualify. That’s because most materials aren’t technically required — but good luck getting through college without them.

Can you ‘double up’ with the Lifetime Learning Credit?

Another restriction of the Lifetime Learning tax credit is that you can’t claim it at the same time as another educational tax break or deduction.

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. While you can take a tax-free distribution from a Coverdell account in the same year you claim the Lifetime Learning Credit, you can’t use the same expenses for both benefits.

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.

How do Lifetime Learning Credit and American Opportunity Tax Credit compare?

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 even the maximum Lifetime Learning Credit. In fact, you can claim up to $2,500 for each qualifying student with the American Opportunity Tax Credit.

Plus, 40% of the American Opportunity Tax Credit is refundable, up to $1,000. 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 Tax 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 Learning Credit — that’s because the American Opportunity Tax Credit only counts toward the first four years of a higher education.

How can you 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 to see if you can reduce your taxes by up to $2,000.

The online tax preparation service of your choices can help you check your options and pick the best ones 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.

In the meantime, take advantage of tax-advantaged savings accounts. This guide explains how to make the most of your 529 savings plan for college.

Christina Majaski contributed to this report.