The Lifetime Learning Tax Credit
The Lifetime Learning Tax Credit is an education tax benefit that allows taxpayers a credit of up to $2,000 for the qualified tuition and educational expenses of a student. This tax credit is nonrefundable and it applies to students at the undergraduate and graduate levels. To qualify, the student must be part of the taxpayer’s family ― either the taxpayer themselves, their spouse, or a dependent ― and enrolled in an eligible educational institution.
Credits lower your taxes. Tax credits provide a dollar-for-dollar reduction of your income tax liability. For instance, a $1,000 tax credit actually saves you $1,000 in taxes. On the other hand, deductions lower your taxable income and they are worth the percentage equal to your marginal tax bracket. For instance, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).
A tax credit is always worth more than a dollar-equivalent tax deduction, because deductions are calculated using percentages. Referring to the numbers above, you can see that a $1,000 credit offers a savings of $750 more than a $1,000 deduction.
You may claim the Lifetime Learning Tax Credit if you meet all of the following requirements:
- You pay qualified tuition and related expenses of higher education
- You pay the tuition and related expenses for an eligible student
- The eligible student is you, your spouse, or a dependent for whom you claim an exemption on your tax return
You cannot claim the Lifetime Learning Tax Credit if any of the following applies:
- Your tax filing status is “married filing separately”
- You are listed as a dependent in the Exemptions section of another person’s tax return (e.g., your parents’)
- Your modified adjusted gross income (MAGI) is above $60,000 (or $120,000 if filing a joint return)
- You (or your spouse) were a nonresident alien for any part of the tax year and did not elect to be treated as a resident alien for tax purposes
- You claim another education tax credit for the same student in the same year
With the Lifetime Learning Tax Credit, the maximum amount you can claim is $2,000 for each eligible student ($4,000 for students in Midwestern disaster areas). The amount of the credit is equal to 20% of the first $10,000 of qualified tuition and educational expenses paid by the taxpayer (20% of $10,000 = $2,000). There is no limit on the number of years that this tax credit can be claimed. However, keep in mind that the credit amount may be reduced depending on your income level and the amount of your tax.
Qualified educational expenses include the following:
- Tuition and fees required for enrollment (at an eligible educational institution)
- Course-related books, supplies, and equipment
Expenses that do not qualify for the Lifetime Learning Tax Credit include the following:
- Medical expenses (including student health fees)
- Room and board
- Similar personal, living, or family expenses
To claim the Lifetime Learning Tax Credit, you must complete Part III and Part IV of IRS Tax Form 8863 (Education Credits) and submit that with your Form 1040 or Form 1040A.
Rules for Combining Education Tax Benefits
Note that there are specific rules regarding which education tax benefits may be used in the same tax year. Federal education tax credits include the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, and the Hope Scholarship Tax Credit.
If you are eligible to claim the Lifetime Learning Tax Credit as well as the American Opportunity Tax Credit for the same student in the same year, you may claim one credit (but not both).
If you pay the educational expenses for more than one student in the same year, you may choose to claim the Lifetime Learning Tax Credit for one student and the Hope Scholarship Tax Credit (or the American Opportunity Tax Credit) for another student.
However, you cannot simultaneously claim the American Opportunity Tax Credit and the Hope Scholarship Tax Credit for different students in the same year. In that case, you can only use one type of education tax credit or the other (the American Opportunity or the Hope) for all eligible students.