Calculating the Lifetime Learning Tax Credit

Tax credits can be a great way to save some cash when it’s time to file your return. Credits like the Lifetime Learning Tax Credit (LLTC) are different from a deduction because it reduces the amount of taxes you owe, dollar-for-dollar. Deductions only subtract from the amount of income you are taxed on. With credits like the LLTC, you must meet all the Internal Revenue Service requirements to claim it.

The LLTC allows low and middle-income taxpayers an opportunity to gain extra benefits at tax time. The U.S. tax code states that taxpayers with qualified educational expenses can claim the credit and reduce the amount of taxes they owe.

What’s a “qualified educational expense?”

The Lifetime Learning Tax Credit is worth up to twenty percent of qualified educational expenses. In most situations, the expenses consist of tuition and fees, limited to those spent for yourself, your spouse, or a dependent. Books, supplies and equipment that are required as a stipulation of enrollment are also considered qualifying expenses.

Other educational costs, such as room and board, cannot be included for the purposes of this credit. Transportation and nonacademic expenses don’t qualify either. The maximum credit amount is $2,000/year, which is based on $10,000 of qualifying expenses.

Income Phase-out

Taxpayers in higher income brackets experience a phase-out of the Lifetime Learning Tax Credit, as is common with most credits and deductions. In 2016, the phase-out begins for single taxpayers at a modified adjusted gross income between $55,000 and $65,000. Taxpayers with MAGI over $65,000 aren’t able to claim any credits, while joint filers experience a phase-out between $110,000 and $130,000.

Form 8863

To calculate educational credits, taxpayers should use Form 8863. The LLTC can be determined using Part II of the form, beginning on Line 3.

You’ll have to enter the name of the student, along with their social security number and qualifying expenses. You can either enter your actual expenses, or the maximum amount of $10,000, whichever is less. The LLTC is calculated by taking 20% of your expenses. Part IV of the Form 8863 determines how your credit will be affected by your MAGI. If the credit amount is not altered by your income, your total becomes the amount of the LLTC.

American Opportunity Credit

There’s an additional educational credit that is claimed using Form 8863. The American Opportunity Credit can be claimed for either you, your spouse, or your dependents. However, the expenses have to be incurred while pursuing an undergraduate degree. The AOTC’s limit is greater than the LLTC at $2,500, and the MAGI limitations are higher as well.

One other difference between two credits is that the AOTC is up to 40% refundable. Taxpayers can receive the credit as a refund if the amount exceed their tax liability. The Lifetime Learning Credit isn’t refundable, which means the credit can only be claimed up to the amount of tax you owe.

You are only able to claim one of the two educational credits in a single year for a student. You also can’t claim the AOTC for a student for more than four years.