Learning education credit
To offset the cost of higher education, you can claim the Lifetime Learning Credit on your federal income tax return. This credit reduces your tax bill on a dollar-for-dollar basis, on a portion of the tuition fees and other qualifying expenses. These are fees and expenses you paid for yourself, a spouse, or a dependent, for undergraduate, graduate and professional degree courses and courses taken to improve job skills.
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How does the Lifetime Learning Credit work?
The LLC is a non-refundable credit. This means that it can only reduce your tax liability to 0, and you cannot receive any leftover amount as a refund.
For example, if the credit reduces your tax liability to a negative number, such as receiving a $1,500 tax credit when you owe $1,400 in taxes, the extra $100 won’t end up in your pocket.
Qualifying for the Lifetime Learning Credit
The student must be yourself, your spouse, or a dependent that you listed on your tax return and have been enrolled for at least one academic period beginning in the tax year. The costs must be qualified educational expenses at an eligible educational institution.
Calculating your Lifetime Learning Credit
The credit is worth up to $2,000 per tax return – or 20% of up to $10,000 in eligible costs.
- You can include the cost of tuition, fees and any books or supplies you are required to purchase directly from the school, so long as it’s a condition of enrollment.
- For example, if your professor recommends that you purchase a textbook but you can still enroll in the class without one, then you cannot include the cost of the textbook in the credit.
How do I claim the Lifetime Learning Credit?
To claim the Lifetime Learning Credit, you must file a federal tax return, complete Form 8863, Education Credits, and attach the completed form to your tax return (Form 1040 or Form 1040A).
At the end of the year, your educational institution should send you a Form 1098-T that reports your eligible costs – just enter these figures on Form 8863.
No double benefits
However, you aren’t able to claim the American Opportunity credit in the same year that you claim the Lifetime Learning credit – the IRS only allows one tax reduction per student, per year.
Is the American Opportunity Credit or Lifetime Learning Credit better?
We recommend determining whether you qualify for the American Opportunity Credit before you claim for the Lifetime Learning Credit. This is because the American Opportunity Credit can provide greater tax savings for students in their first four years of post-secondary education. The maximum amount for the American Opportunity Credit is $500 more – it is $2,500.
What is the American Opportunity Credit?
The American Opportunity credit is aimed at taxing college students or their parents, to reduce the costs of education. This credit can offer greater tax savings compared to other education related tax benefits. The American Opportunity credit reduces your taxes on a dollar-for-dollar basis, rather than just reducing your income tax liability.
There are several requirements to be eligible to receive the American Opportunity credit.
To be a student that is eligible for the American Opportunity credit, you must meet the following criteria:
- Be enrolled in at least one academic semester during the applicable tax year;
- Maintain at least half-time status in a program that leads to a degree or credential;
- Have not completed the first four years of post-secondary education;
How many times can I claim the American Opportunity Tax Credit?
As an eligible student, you can receive a maximum of one American Opportunity tax credit each year. If you are a parent claiming the American Opportunity credit for your dependent students, and have two eligible dependents, you can claim different educational tax benefits for them. You just can’t claim more than one tax benefit per year for each student.
Qualifying for the American Opportunity Tax Credit
You’re eligible for the American opportunity tax credit if your student:
- Is enrolled at least half time for at least one academic period beginning in the tax year.
- Hasn’t finished the first four years of schooling at the beginning of the tax year.
- Hasn’t previously claimed the AOTC for more than four tax years.
- Is pursuing a degree or another recognized education credential.
- Doesn’t have a felony drug conviction at the end of the tax year.
You also must have a modified adjusted gross income (MAGI) or $90,000 or less ($180,000 if you’re married filing jointly). The amount of the credit is gradually phased out for MAGIs between $80,000 and $90,000 (or $160,000 and $180,000 for married filing jointly).
What educational expenses qualify under the American Opportunity Credit?
The American Opportunity credit does not cover costs associated with the following:
- Room
- Board
- Medical insurance
- Transportation
Given that the purchased items you are claiming relate to the program of your study, expenses that qualify for the American Opportunity credit include the costs of:
- Supplies
- Books
- Equipment for your studies
These can be claimed as long as you are paying tuition fees to an eligible educational institution.
What if I’m way behind on my U.S. tax returns?
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Why am I not eligible for the American Opportunity credit?
You are not eligible for the American Opportunity credit if:
- You have completed the first four years of post-secondary education
- Have less than half-time status in a degree program.
- Have been convicted of a state or federal crime because of a drug conviction.
Applying for the American Opportunity Tax Credit
To claim this credit, you’ll need to receive a Form 1098-T, Tuition Statement, from an eligible educational institution, and then complete Form 8863.
Can I claim education credits if I have a 529 plan?
You can both pay for qualifying educational expenses with your 529 plan tax-free and take advantage of educational tax credits, so long as you don’t double up on benefits. In other words, you cannot claim the American opportunity tax credit or lifetime learning credit on expenses that were paid for using a 529 plan.
What is a 529 Plan / Qualified Tuition Program?
529 plans, known as ‘qualified tuition plans’, are tax-advantaged savings plans for future education costs. These plans are authorized by Section 529 of the Internal Revenue Code, and are sponsored by states, state agencies, or educational institutions. There are two types of 529 plans: prepaid tuition plans and education savings plans.
Qualified tuition plans are sponsored by states, state agencies, or educational institutions. All fifty states sponsor at least one type of plan. Additionally, a handful of private colleges and universities sponsor a prepaid tuition plan.
Can I make withdrawals from a 529 plan and claim learning education credit?
Yes, you can claim an education credit including the American Opportunity Credit or Lifetime Learning Credit in the same year that you withdraw funds from a 529 plan.
If you use your 529 account to make withdrawals for qualified higher education expenses or tuition for elementary or secondary schools, earnings made in your 529 account will not be subject to federal income tax, and in most cases, state income tax. If withdrawals are not used for these reasons, they will be subject to taxes and an additional 10% federal tax penalty on earnings.
The longer your investment, the more money you will grow, and therefore the greater your tax benefits.
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