Understanding the Lifetime Learning
What Is It?
The Lifetime Learning credit is a tax credit available to individuals who file a tax return and owe taxes. The amount of the credit is subtracted from the taxes owed, rather than reducing taxable income as with a tax deduction. Individuals who do not pay taxes are not eligible for a Lifetime Learning credit. Taxpayers who owe less tax than the maximum amount of the Lifetime Learning tax credit for which they are eligible can only take a credit up to the amount of taxes owed.
A family may claim a tax credit of up to $2,000 per tax year for the taxpayer, taxpayer's spouse, or any eligible dependents for an unlimited number of tax years ($4,000 for Gulf Opportunity Zone students). If you are claiming a lifetime learning credit for both Gulf Opportunity Zone students and other students, the qualified education expenses taken into account in Part II of the 8863 form [pdf] cannot exceed $10,000 reduced by the qualified education expenses of the Gulf Opportunity Zone students. The amount of the Lifetime Learning tax credit is 20% of the first $10,000 of qualified educational expenses paid for all eligible students. Therefore, the maximum amount of a Lifetime Learning tax credit is $2,000. The Lifetime Learning credit is available for all years of postsecondary education and for courses to acquire or improve job skills, unlike the Hope credit which is only available for two years.
The actual amount of the credit depends on a family's income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition. This credit is family-based (up to $2,000 per tax return or $4,000 for Gulf Opportunity Zone students) rather than based on the number of dependents in a family as with the Hope credit.
The Taxpayer: An eligible taxpayer must file a tax return and owe taxes to claim the credit. The taxpayer must also claim the eligible student as a dependent unless the credit is for the taxpayer or the taxpayer's spouse. (This means the eligible taxpayer may also be the eligible student.) You cannot claim a Lifetime Learning credit if your Modified Adjusted Gross Income (MAGI) is $55,000 or more (if single), or $110,000 or more (for married taxpayers filing a joint return). MAGI limits were increased by $2,000 for single taxpayers and married taxpayers for the 2006 tax year. Taxpayers that claim the Hope credit or tuition and fees deduction for a student are not eligible to claim the Lifelong Learning credit for the same student.
The Student: An eligible student may be enrolled in an eligible program leading to an undergraduate or graduate degree at an eligible school during the calendar year OR may be enrolled in any course of instruction at an eligible school to acquire/improve the student's job skills during the calendar year. Students may claim the credit themselves if they are not claimed as a dependent by another taxpayer. (Once again, this means that the eligible student may also be the eligible taxpayer.)
How Do You Get It?
To apply for the credit, the taxpayer must report the amount of tuition and fees paid as well as the amount of certain scholarships, grants, and untaxed income used to pay the tuition and fees. The law specifies that schools will send this information by January 31, 2007, in the form of a 1098-T statement to individual taxpayers and to the IRS. Taxpayers will use this information and their own records about tuition and fees paid when they fill out the IRS Form 8863 [pdf] to claim the tax credit. The statement sent by the school will also include contact information for someone at the school who can answer questions about the information on the form. A taxpayer may wish to talk to a tax advisor for help in calculating the amount of its credit.
When Is It Available?
Generally, the deduction is allowed for qualified tuition and expenses paid in 2006 in connection with enrollment at an institution of higher education during 2006 or for an academic period beginning in 2006 or in the first three months of 2007. For instance, if you paid $1,500 in December 2006 for qualified tuition for a spring 2007 semester that begins in January 2007, that $1,500 can be used to figure the 2006 deduction.
Can A Family Claim Multiple Benefits?
A family may claim a Lifetime Learning credit, a Hope credit, and an exclusion from gross income for certain distributions from qualified state tuition programs or education IRAs as long as the same student isn't used as the basis for each credit or exclusion AND the family doesn't exceed the Lifetime Learning maximum per family.