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.
How the Lifetime Learning Tax Credit works
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.
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.
Who is eligible to claim the Lifetime Learning Tax Credit?
Taxpayers who meet the following requirements are eligible to claim the Lifetime Learning Tax Credit:
- The taxpayer’s annual modified adjusted income in 2019 is $68,000 or less ($136,000 if married filing jointly). The credit phases out for taxpayers with income between $58,000 and $68,000 ($116,000 and $136,000). The 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 Tax 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.
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).
Coordinating the Lifetime Learning Tax credit 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.