The Lifetime Learning Tax Credit (LLTC) allows eligible taxpayers to claim an annual tax credit of up to $2,000 to help cover college and continuing education costs for themselves, a spouse and dependent children. The Lifetime Learning Tax Credit can be claimed once per taxpayer per year, for an unlimited number of years.
When a taxpayer is eligible for either the Lifetime Learning Tax Credit or the American Opportunity Tax Credit (AOTC), the taxpayer should consider claiming the AOTC, since it provides a greater amount of tax savings per dollar of tuition and textbook expenses.
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What Is the Lifetime Learning Credit?
The Lifetime Learning Tax Credit is an annual tax credit that can be claimed for postsecondary education expenses such as tuition, fees, books, supplies and equipment required for a degree program or for courses that help acquire or improve job skills. You can deduct this amount from the total amount of federal tax you need to pay when you file your tax return.
The Lifetime Learning Tax Credit is equal to up to 20% of the first $10,000 spent on qualified higher education expenses. The Lifetime Learning Tax Credit may be claimed in an unlimited number of tax years, but the Lifetime Learning Tax Credit is limited to one tax credit per taxpayer per year.
The $10,000 cap includes the total amount of qualified education expenses incurred by the taxpayer, their spouse and their dependent children in a given tax year.
Unlike the AOTC, a student does not have to be pursuing a degree or certificate program in order for postsecondary education expenses to qualify for the LLTC.
How to Claim the Lifetime Learning Tax Credit
To claim the Lifetime Learning Tax Credit, taxpayers must complete and submit Form 8863 with their federal income tax return. The taxpayer must have a Social Security Number or Individual Taxpayer Identification Number (ITIN).
You’ll also need to get Form 1098-T from your college or eligible educational institution, which aims to help you work out the amount of your credit. Check the amount shown in Box 1 of the form, and cross-reference this against the qualified education expenses you’re eligible to claim, as some may not be included in this amount. If you don’t receive the 1098-T or it’s incorrect, get in touch with your school to get your form.
Use this information to add your Lifetime Learning credit on line 3 of your Form 1040 or Form 1040-SR, then submit the completed form, along with your Form 8863 to the IRS when you file your taxes.
Eligibility Requirements for the Lifetime Learning Credit
Taxpayers who meet the following requirements are eligible to claim the Lifetime Learning Tax Credit:
- The taxpayer’s annual modified adjusted income in 2021 is $90,000 or less ($180,000 if married filing jointly). The credit phases out for taxpayers with income between $80,000 and $90,000 ($160,000 and $180,000). The Lifetime Learning Credit income limits are adjusted annually for inflation.
- The taxpayer, their spouse or a dependent child incurred qualified expenses at an eligible postsecondary education institution
- The taxpayer, spouse or dependent has received or will receive a Form 1098-T from an eligible domestic or foreign education institution, or if the college isn’t required to send Form 1098-T, the taxpayer can demonstrate they were enrolled at the college and paid for qualified expenses
- The taxpayer is not listed as a dependent on another person’s tax return
The Lifetime Learning Tax Credit is not available when:
- The taxpayer claimed the AOTC during the same tax year
- The taxpayer pays for college expenses for someone who is not a dependent
- The taxpayer files federal income tax returns as married filing separately
- The taxpayer or their spouse was a nonresident alien who is not treated as a resident alien for tax purposes
Unlike the AOTC, felony drug convictions do not make the student ineligible for the LLTC.
Qualified Expenses for the Lifetime Learning Credit
Qualified expenses for the Lifetime Learning Tax Credit include tuition, fees and course materials required for enrollment in a course at an eligible college or university. The student may be taking the course as part of a degree program or to acquire or improve job skills.
Other qualified expenses include:
- Fees or expenses for required textbooks, supplies and equipment when paid to the eligible institution.
- Qualified expenses purchased with student loan proceeds
- Qualified expenses that were not refunded when a student withdraws from an eligible institution
- Qualified expenses paid in the current tax year for an academic period beginning within three months of the following tax year
The student’s Form 1098-T will provide a list of qualified tuition and related expenses that can be used to justify the LLTC or the AOTC, including any expenses prepaid for an upcoming academic period.
Lifetime Learning Credit vs. American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is another federal tax incentive designed to help families pay for college expenses. Previously known as the Hope credit, the AOC can be claimed for expenses related to your or your child’s college expenses of up to $2,500 per tax year. You can also refund up to 40% of the remaining amount of the AOTC if it reduces your tax liability to zero.
Note that you can only claim the Lifetime Learning Credit or the American Opportunity Tax Credit – you cannot claim both for the same expenses.
The key differences between the Lifetime Learning Credit and the American Opportunity Tax Credit are:
- The maximum amount you can claim on the LLC is $2000 per year, compared to $2500 for the AOTC.
- The AOTC can only be claimed for the first four years of undergraduate studies, while the LLC can be applied to undergraduate and graduate programs, as well as some trade schools and professional programs.
- You can claim multiple credits on the AOTC if you have more than one student listed as a dependent, but you can only claim up to $2000 on the LLC in the same tax year, even if you have multiple children.
- To be eligible to claim the AOTC, the student must be studying at least half-time towards a degree, but there’s no such requirement for the LLC.
Other Educational Tax Credits and Deductions
The Lifetime Learning Credit is just one of a number of tax credits and deductions offered by the federal government to subsidize higher education and encourage families to send their children to college by lowering students’ or their parent’s income tax liability.
Another major tax credit offered by the federal government for expenses related to college education is the American Opportunity Tax Credit. This is similar to the LLC in that it allows you to claim a credit for educational expenses, reducing your tax liability. Although it is slightly more than the LLC and can be claimed for multiple dependent children, you can only claim it for undergraduate students and only for the first four years of study.
Another scheme offering tax deductions for higher education expenses is the tuition and fees deduction, which allows you to deduct higher education expenses from your taxable income. The scheme allows you to deduct up to $4000 each tax year.
There is also a range of tax benefits associated with 529 plans. Under these savings plans, your earnings grow tax-deferred and disbursements are tax-free as long as you use them for college tuition and qualified higher education expenses. Disbursements are also tax-free when used for primary and secondary tuition, up to a limit of $10,000 per year.
Similarly, earnings in Coverdell ESAs (Education Savings Accounts) grow tax-deferred, and distributions used for elementary, secondary, and college tuition and expenses are tax-free.
How to Coordinate the LLC with 529 Plan Distributions
Taxpayers may claim the Lifetime Learning Tax Credit in the same year a tax-free distribution is made from a 529 plan or Coverdell Education Savings Account as long as there is no double-dipping. Different expenses must be used to justify the Lifetime Learning Tax Credit and a tax-free distribution from a 529 plan. For example, families who claim the maximum Lifetime Learning Tax Credit and have $16,000 in qualified education expenses in a given tax year may withdraw $6,000 tax-free from a 529 plan.
$16,000 – $10,000 (used to generate the LLTC) = $6,000 tax-free 529 plan distribution
If the student receives any tax-free educational assistance, such as a scholarship, Veteran’s educational assistance or employer-provided education assistance, the amount of the benefit must also be subtracted from the total amount of qualified education expenses. For example:
$16,000 – $10,000 (used to generate the LLTC) – $2,500 (scholarship) = $3,500 tax-free 529 plan distribution
Depending on the tax bracket and other details of the student’s specific circumstances, it may be beneficial to choose to include all or part of the scholarship in taxable income in order to maximize the amount of the Lifetime Learning Tax Credit. For example, if the marginal tax rate is less than 20% and the amount of qualified expenses after subtracting the scholarship is less than $10,000, the taxpayer may reduce their tax liability by including all or part of the scholarship in income.
Since the Lifetime Learning Tax Credit is worth more per dollar of qualified expenses than a tax-free distribution from a 529 plan, it is best to allocate $2,000 in tuition, fees and required course materials for the Lifetime Learning Tax Credit before taking a tax-free distribution from a 529 plan. The AOTC is always worth more than the LLTC.
The Bottom Line
The Lifetime Learning Credit allows you to claim a credit for up to $2000 off your federal income taxes for expenses related to your own college education or that of your spouse or dependent child. A similar scheme is the American Opportunity Tax Credit (AOTC), but the LLC is more flexible, as it can be applied to graduate degrees as well as undergraduate ones, and some professional and trade programs, with no minimum half-time study requirement.
Taking full advantage of these tax credits, deductions, and tax-advantaged accounts is one of the best things you can do to make college more affordable.
Frequently Asked Questions (FAQs)
How many times can you claim the Lifetime Learning Credit?
You can only claim the Lifetime Learning Credit for a total of $2000 per tax year. You can’t claim it multiple times for each of your dependent children, unlike the AOTC. However, there is no maximum number of years that you can claim the LLC.
Rather, you can claim this credit for as many years as you’re eligible to do so, that is, while you or your child are enrolled in an undergraduate or graduate degree, or eligible professional or trade studies.
Where does the Lifetime Learning Credit go on Form 1040?
You’ll need to add the Lifetime Learning Credit on line 3 of your Form 1040 or 1040-SR, then submit this along with Form 8863.
When does the Lifetime Learning Credit expire?
There’s no time frame or cut-off to claim the Lifetime Learning Credit, as long as you or your dependent child is enrolled in an eligible higher education program.
Can parents claim the Lifetime Learning Credit?
Yes – parents can claim the Lifetime Learning Credit on behalf of their child, as long as the child is considered a dependent. However, they don’t get the credit for every child, but rather can only claim up to the maximum of $2000 per tax year, regardless of how many eligible dependents they have.