In a world where rapid advances and innovations in technology are constantly forcing us to learn how to do new things, or how to do things in new ways, in order to keep our jobs, to gain access to new job markets, to take advantage of new opportunities, or just to keep up with the pace of daily life, the idea of education as a life-long process takes on new meaning and importance. Fortunately, U.S. federal income tax provisions include some relief to help us with the cost of continuing education to keep up with the pace.
Lifetime Learning Credit
As its name suggests, the Lifetime Learning Credit is intended to provide tax relief for educational expenses over the long run. A tax credit is a direct reduction of your income tax, so it reduces your taxes dollar-for-dollar for the amount you spend on qualified education expenses, up to the maximum amount allowed. While there are certain requirements and limitations, the Lifetime Learning Credit is flexible in the sense that you do not have to be studying for a degree. The education expenses can be for acquiring or improving job skills, or learning a new trade or profession. And there is no limit in terms of the number of years you can take the credit. In this sense, it is intended to help you continue to learn throughout your lifetime.
There are actually two tax credits available to help you offset the costs of higher education. They are the Hope credit and the Lifetime Learning Credit, also referred to as the education credits. There is also a deduction for tuition and fees, which is an adjustment to income in determining your adjusted gross income on Form 1040. You may want to calculate the net tax effect of both credits and the deduction, and choose the method that gives you the lower overall tax.
What is the tax benefit of the Lifetime Learning Credit?
The amount of the Lifetime Learning Credit is 10% of up to $20,000 of qualified educational expenses per year, so you may be able to reduce your income taxes by up to $2,000 in any year.
Who can claim the credit?
There are three requirements you must meet in order to claim the Lifetime Learning Credit.
The expenses you paid must be considered qualified higher education expenses.
The person for whom the expenses were paid must be considered an eligible student.
The eligible student must be either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
What education expenses qualify?
The educational expenses that qualify for the Lifetime Learning Credit are tuition and certain related expenses that you have to pay in order to be enrolled in a course at an eligible educational institution. You do not have to be a full-time student and you do not have to be pursuing a degree. The cost of a course for acquiring or improving your job skills, for example, would qualify as an educational expense for this credit.
For purposes of this credit, eligible educational institutions include virtually all accredited postsecondary institutions, including colleges, universities, vocational schools, or others that are eligible to participate in a student aid program administered by the U.S. Department of Education. These institutions can be public or privately owned, and include nonprofit organizations.
Tuition, or the amount you pay for the course itself, is a qualified expense. Qualified related expenses include student-activity fees and expenses, provided that they must be paid as a condition of enrollment or attendance. Qualified expenses also include books, supplies, equipment, and other materials you need for the course.
There are some expenses related to education that do not qualify for the Lifetime Learning Credit. For example, if you are studying at a college or university, your expenses for room and board do not qualify for this credit. Insurance, medical expenses, transportation, and similar personal or living expenses do not qualify either.
If you pay for your education with the proceeds of a loan or other money you borrow, you can still claim the credit. But you cannot claim a credit for expenses you pay with a tax-free scholarship, grant, or employer-provided educational assistance.
Who is an eligible student?
The only requirement for claiming the Lifetime Learning Credit is that the student is enrolled in one or more courses at an eligible educational institution. The courses do not have to be part of a program to obtain a degree or other certification. A one-time course that you take to learn a new skill, for example, would qualify you as an eligible student.
To claim the credit, the student must be yourself, your spouse, or a dependent you can claim on your tax return.
Comparison of Lifetime Learning Credit and Hope Credit
Another tax credit that is available for education expenses is the Hope Credit. You can take either the Hope Credit or the Lifetime Learning Credit for each eligible person in one year. If you paid qualified education expenses for more than one student in the same year, you can choose to take either of the credits on a per-student, per-year basis. For example, you could claim the Hope credit for one student and the Lifetime Learning Credit for another student in the same year. You may want to do the calculations for both credits for each student, to see which gives you the most tax benefit.
The following are some of the basic differences between the Hope Credit and the Lifetime Learning Credit:
The Lifetime Learning Credit allows you to take a credit of 20% of qualified tuition and related expenses up to $10,000 per year, for a total credit of $2,000 for all eligible students on each annual tax return. The Hope Credit allows you to take a credit of up to $1,500 per student, per year.
The Lifetime Learning Credit is available for all years of postsecondary education and for courses to acquire or improve job skills. The Hope Credit is available only for the first 2 years of postsecondary education.
The Lifetime Learning Credit is available for an unlimited number of years, while the Hope Credit is available only for 2 years per eligible student.
For the Lifetime Learning Credit, the student does not have to be pursuing a degree or other credential. For the Hope Credit, the student must be pursuing an undergraduate degree or other credential.
The Lifetime Learning Credit is available for one or more courses. For the Hope Credit, the student must be enrolled at least half time for at least one academic period beginning during the year.
Who cannot claim the credit?
There are specific cases in which the Lifetime Learning Credit cannot be claimed.
Your filing status is married filing separately.
You are claimed as a dependent on someone else’s tax return (such as your parents’).
Your modified adjusted gross income is over the limit. These limits may be changed each year and are published by the IRS. Generally, the limit is double the amount if you are married filing jointly.
You (or your spouse) were a nonresident alien for any part of the year and the nonresident alien did not elect to be treated as a resident alien for tax purposes.
You claim the Hope credit or a tuition and fees deduction for the same student that year. You cannot take a double deduction or credit.
How to claim the Lifetime Learning Credit
You must complete and file Form 8863 - Education Credits (Hope and Lifetime Learning Credits) to claim either of these credits.
Final Note
Keep on learning, keep yourself up-to-date, prepare yourself to take on new challenges and opportunities, and keep records of your tuition and related expenses so you can take advantage of this special tax benefit.