The Lifetime Learning tax credit is equal to 20% of the first $10,000 in tuition expenses you pay per year, up to a maximum credit of $2,000. You must have at least $10,000 in qualified expenses in a given year to claim the whole $2,000 credit, however. If you spend just $5,000, your credit will reduce to $1,000, or 20% of that amount.
You can claim the Lifetime Learning credit if you, your spouse, or any of your dependents are enrolled at an eligible educational institution and responsible for paying those college costs.
$10,000 is the collective cap. You can't claim a credit for each student.
The Lifetime Learning credit isn't restricted to the first four years of undergraduate enrollment, and the student doesn't necessarily have to attend full time; you might still be eligible if you took only one class.
Eligible Educational Institutions
All accredited colleges, universities, vocational schools, and other post-secondary institutions qualify as eligible educational institutions. You can use tuition paid to the school for claiming the Lifetime Learning credit if the learning institution is eligible to participate in federal student aid programs through the U.S. Department of Education.
Qualifying expenses include amounts paid for tuition and any required fees, such as registration and student body fees. They do not include books, supplies, equipment, room and board, insurance, student health fees, transportation, or living expenses.
You must reduce your qualifying expenses by the amount of any financial assistance received from grants, scholarships, or reimbursements. Still, you don't have to reduce them if you pay college tuition using borrowed funds. This borrowing includes student loans or gifts from family members.
Who Can Claim the Education Credits?
If your dependent child is going to college—and if you're paying for it—you can claim the education credit on your tax return. If your child is paying for their education themselves, they can claim education credits on their tax return—unless you claim them as a dependent.
You can't claim the Lifetime Learning credit if you pay college expenses for someone who isn't your dependent, and you can't claim it if you're married but filing a separate tax return. Non-resident aliens can't claim the credit if they don't elect to be treated as resident aliens for tax purposes.
The amount of the Lifetime Learning credit you can claim begins to phase out at certain income limits. Your tax credit amount isn't reduced if your modified adjusted gross income (MAGI) is below the phase-out limit, but it will be reduced if your income is more. MAGI thresholds for tax year 2020 are $58,000—$68,000 for single or head-of-household filers, and $116,000—$136,000 for people married and filing jointly.
American Opportunity Tax Credit
The American Opportunity tax credit is restricted to the first four years of undergraduate classes. The Lifetime Learning credit is available for any level of post-secondary education—undergraduate, graduate, extension courses, or even vocational schools.
You can't claim both the Lifetime Learning credit and the American Opportunity credit for the same student in the same year. However, you can claim the Lifetime Learning credit for one student and the American Opportunity credit for another.
The American Opportunity credit can often be greater, so taxpayers typically only claim the Lifetime Learning credit when they cannot claim the American Opportunity credit due to its enrollment restrictions. It begins phasing out for single taxpayers with MAGIs of $80,000 and $160,000 for married couples filing jointly. Those with MAGIs of $90,000 or $180,000, respectively, aren't eligible to claim it. This income limit is a somewhat larger income range, compared to the Lifetime Learning credit.
Up to 40% of the American Opportunity credit is refundable up to $1,000. If you have any credit left over after it reduces your tax owed to zero, you'll receive a refund for up to 40% of the total credit. The Lifetime Learning credit isn't refundable. It can bring any tax you might owe down to zero, but the IRS will keep the rest.
The American Opportunity credit is primarily geared toward four-year degree programs. The student must also have no felony drug convictions. Having a felony conviction also does not preclude a student from qualifying for the Lifetime Learning credit.
Claiming the Lifetime Learning Credit
Claiming the Lifetime Learning credit requires filing IRS Form 8863 with your tax return. Completing Parts III and IV of this form will help you figure out the amount of credit you can claim.
Tax laws change periodically and you should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.