An Overview of the Rules regarding the Lifetime Learning Tax Credit

The Lifetime Learning Tax Credit is a federal income tax credit offered to U.S. taxpayers who are pursuing higher education. This credit can help reduce the amount of tax owed.

The credit is based on a configuration which calculates the percentage of a student’s qualified college expenses and then offers a credit which helps offset education costs. Taxpayers can claim this credit once per tax year and this credit is limited to one credit per household tax return. There are other stipulations associated with the Lifetime Learning Tax Credit that are useful to know about.

Here is a rundown of the other rules taxpayers must follow when looking to claim this education credit:

*Student Status

Anyone in a family is eligible, and there are no age stipulations associated with the Lifetime Learning Credit. The qualifier for the credit can be you, your spouse, child or other dependent.

The student can be either full or part time (even one college class is eligible!) The only catch is the student has to be enrolled at an approved learning institution and the person claiming the credit was responsible for paying the college expenses.

This makes the credit pretty easy to claim since many colleges are eligible learning institutions. The level of education does not matter; qualifying students can be taking classes at the undergraduate, graduate or professional levels. Certain vocational schools may also fall under the eligibility guidelines.

It is important to note that courses taken for personal enrichment, fun, non-credit, hobby or fitness/sport are not eligible for tax credit. The tuition and related expenses must relate to a degree program.

If any of the above this applies to you, it is a good idea to research and/or inquire to see if you qualify for this tax credit.

*Eligible Expenses

Not all school related expenses are qualifiers under the Lifetime Learning Tax Credit rules. The expenses you can claim are strictly ones paid for tuition, books and academic related fees; some equipment may be eligible if the college mandates such a purchase.

This tax credit excludes student activity (often referred to as FSA fees), athletic fees, insurance, room/board, transportation or any personal living expenses.

You’ll have to break down your tuition bill to extract the amounts which are eligible when claiming this credit. Most schools will send you a breakdown of eligible expenses prior to tax filing time, and this can help you determine the amounts you are eligible to claim on your tax return to determine the amount of credit you can receive.

*Rules for Claim

The Lifetime Learning Tax Credit can only be claimed on actual money paid out of pocket. Money received from a grant, scholarship, or other employer funding are not eligible to base this tax credit on.

Additionally, special educational savings account money that was distributed during the year to pay for education expenses is not eligible. For instance, if a Coverdell or 529 Savings Account has been distributed this tax year, the Lifetime Learning credit cannot be claimed on that money distributed.

The reason for this is because the Coverdell/529 money is already tax-free when used for education. However, any money paid for educational expenses above the college savings account money, and paid out of pocket can be used in the calculation to figure out the allowable Lifetime Learning tax credit amount.

*Credit Limits

The credit allows up to $2K for qualified tuition and related educational expenses and reduces the amount of federal income taxes owed. This is based on the first $10K of college tuition and fees.

Since only one credit can be claimed per household, even if multiple family members are attending college, only one Lifetime Learning Credit can still be claimed on a tax return.

Additionally, there is another restriction to claiming the Lifetime Learning Tax Credit. This credit cannot be used at the same time for the same student who is claiming the Hope Credit on the tax return.

*Income Limits

There are income rules associated with the Lifetime Learning Tax Credit. The amount is gradually reduced according to income. According to the IRS, “If your modified adjusted gross income is between $47,000 and $57,000 if you file as a single taxpayer, or $94,000 and $114,000 if you file a joint tax return you cannot claim a Lifetime Learning Tax Credit if your modified gross income is $57,000 or more ($117,000 or more if you file a joint return)” (IRS.gov, 2009).

The Lifetime Learning Tax Credit is a good way to help offset the costs of education and reduce your overall tax amount. Unlike the Earned Income Credit, the Lifetime Learning credit will not give you a refund if you owe no taxes, but what it does is reduce the amount of taxes you are required to pay.

You can learn more about the Lifetime Learning Tax Credit on the U.S. Internal Revenue Service website.