Know Your Tax Credits - The Lifetime Learning Credit

by John Cooney on Feb 4, 2020

Taxes, Tax Planning, Education, Enrolled Agent

As we move towards April 15th’s tax filing deadline, I wanted to spend a few blogs on explaining some of the more popular tax credits that may be available to you.  Last month we talked about the American Opportunity Tax Credit (AOTC) and this month we will discuss another Education Tax Credit, the Lifetime Learning Credit (LLC).  Unlike the AOTC, the LLC is a non-refundable credit, meaning it can reduce the amount you owe on taxes, but only down to zero, you cannot claim the credit if you don’t owe taxes.  The LLC allows you to take a credit for 20% of qualified education expenses, up to $10,000 for a maximum credit amount of $2,000.  Let’s get into some of the details on who is an eligible student, what income limits are in place, and how you claim it.

Who Can Claim The LLC?

To claim the LLC, you must meet all three of the following:

  • You, your dependent, or a third party paid qualified education expenses during the year for higher education
  • You, your dependent, or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution
  • The eligible student is yourself, your spouse, or a dependent listed on your tax return

Who Is An Eligible Student?

  • Student must be enrolled or taking courses at an eligible educational institution
  • Be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills
  • Be enrolled for at least one academic period beginning during the tax year

What Are The Income Limits?

  • For Single filers, to claim the full credit, your Modified Adjusted Gross Income (MAGI) must be $58,000 or less; if your MAGI is over $58,000 but less than $68,000, you are eligible for a portion of the credit; if your MAGI is over $68,000 you cannot claim the credit.
  • For those who are Married, Filing Jointly, to claim the full credit, your Modified Adjusted Gross Income (MAGI) must be $116,000 or less; if your MAGI is over $116,000 but less than $136,000, you are eligible for a portion of the credit; if your MAGI is over $136,000 you cannot claim the credit.

How Do You Claim the Credit?

  • To claim the credit, you must have received a Form 1098-T (tuition statement) from an eligible educational institution
  • The 1098-T will have an amount in Box 1 to show you the total amount received during the tax year
  • This may not be the total of all of your qualified educational expenses, make sure to keep track of those expenses throughout the year to maximize your credit
  • Use IRS Form 8863 when filing your taxes to claim your LLC

Example, Married Couple with One Student

  • Tom and Mary’s son Stephen just finished his Freshman year at the University of Massachusetts, where he was a full-time student with no drug convictions.  For the year, Tom and Mary’s MAGI was $110,000.  In February, Tom and Mary received a 1098-T from UMass showing a total of $19,500 in Box 1.  They had no other qualified expenses during the year.  Tom and Mary would be able to claim the full $2,000 LLC.

                        Total Qualified Expenses - $19,500

                        LLC Credit – 20% up to $10,000 = $2,000

The remaining $9,500 in expenses would still be available for use as qualified expenses for other education benefits like 529 plans, AOTC, Education Savings Accounts, etc.

You Still Can’t Double Dip!

  • It is important to remember though, the IRS does not like double dipping!  Since they are claiming the LLC, that reduces the qualified expenses that can be accounted for by a 529 distribution or other education benefit to $9,500
  • If you are planning on using multiple benefits, like a 529, AOTC, LLC, etc. it is important to talk with a financial professional who can help you coordinate the benefits to maximize the use of each one

An Important Difference Between the AOTC and the LLC

An important difference between the AOTC and the LLC, is that the AOTC limit is per student, the LLC limit is per tax return.  So, if you had three children, each eligible for the AOTC, you could claim a total of $7,500 ($2,500 for each).  However, with the LLC, you would be limited to $2,000, regardless of how many eligible students you had on the return.   

 

Have questions on whether you or your child are eligible for the LLC?  How about on how to calculate how much of the credit you can claim?  We are here with your tax and credit answers, set-up a complimentary tax planning meeting by contacting me at john@greenandgoldfinancial.com.