Understanding the Lifetime Learning Credit

Lifetime Learning Credit is a tax credit to help offset the cost of higher education. A taxpayer can receive up to $2,000 of credit PER TAX RETURN (and not per student) and it is available for all years of post-secondary education and for courses to acquire or improve job skills. Student does not need to pursue a degree or other recognized education credential and the number of courses can be one or more. Unlike the Hope, students convicted of a federal or state felony for possession or distributions of controlled substances in the tax year ARE PERMITTED. The credit is a non-refundable credit, meaning that it can reduce your tax liability to zero but you cannot receive a refund for any excess credit.

To claim the credit, you must pass the following tests:

  • Post-Secondary Education Test – You paid expenses for any years of post-secondary education. This includes expenses paid for vocational school, all four years of undergraduate, and all graduate classes. Expenses paid for courses to improve or acquire job skills also qualify.
  • Dependency Test – You paid expenses for an eligible student such as yourself, spouse, or a dependent that you can claim an exemption. The tax filer is not listed as a dependent on another person’s tax return.
  • Filing Status Test – Your filing status must not be “married filing separate.”
  • Income Test – Your modified adjusted gross income (MAGI) for the tax year 2009 is less than $60,000 for single taxpayers (or less than $120,000 for joint filers)
  • Residency Test – You were not a nonresident alien for any part of the tax year and did not elect to be treated as a nonresident for tax purposes.
  • No Double Benefit Test – You did not claim the Hope credit, the American Opportunity credit, the tuition and fees deduction, the tax-free portion of the Coverdell education savings account for the same qualified expenses for the same student. In other words, no double tax benefit allowed. You did not claim qualified expenses paid for by tax-free educational assistance such as scholarships, grants, employer provided educational assistance, or any other tax-free payments received as educational assistance. However, if you have these assistances, you can still claim the excess qualified expenses that are not covered by these tax free educational assistance. For example, your tuition is $10,000 and you have a scholarship of $8,000. You cannot claim the $8,000 on your tax return but you can still claim the $2,000 difference.
  • Tuition Fee Refund Test – You did not receive a refund for any qualified education expenses paid.

What expenses qualify?

  • Expenses paid for an eligible educational institution. An eligible educational institution is any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the US Department of Education.
  • Tuition fees
  • Student activity fees and expenses paid for course-related books, supplies and equipment if the expenses must be paid to the institution as a condition of enrollment or attendance.
    • Example 1 – Lawrence is a freshman in college in the pre-med program. In addition to tuition, he is required to pay a fee for the rental of laboratory equipment and purchase book from the school. The school has a policy of requiring the students to purchase the books at the institution’s bookstore and to pay the lab rental fees as a requirement of enrollment or attendance. Both student fees and books are qualified educational expenses.
    • Example 2 – Charles and Darwin are sophomore students of California State University and are required to purchase course related books to attend the university. The school does not have a policy on how students should obtain the books, meaning the students can purchase their books from anywhere they wish. Paul bought his books at the university’s bookstore while Piper bought her books from an online bookstore. Both expenses paid for the books are not qualified educational expenses.

What expenses do not qualify?

Medical expenses, insurance, room and board, transportation, similar personal or family expenses even if the expenses must be paid to the institution as a condition of enrollment or attendance.

How do you calculate the Credit?

The Lifetime Learning credit per eligible student is calculated as follows:

1. 20% of the first $10000 of the qualified education expenses paid.

Credit may be reduced based on your MAGI.

Can I claim the credit even if I borrowed the funds?

Most students have student loans in order to pay for their education. Borrowing funds count towards the credit since you will be paying for this not now but in the future.

Source: IRS.gov