What if learning could reduce your taxes? It may be possible with the Lifetime Learning Credit (LLC), available to adult students at any stage of life. This tax credit uses your education expenses to offset what you owe to the IRS. Here's how the LLC works and what you need to qualify.
What is the Lifetime Learning Credit?
The Lifetime Learning Credit is a tax break for tuition and mandatory fees to attend postsecondary institutions (after high school). Your education expenses reduce what you owe in taxes for the year. The Lifetime Learning Credit applies to college/university expenses, graduate school, continuing education, professional training, and vocational training.
This credit applies to education spending for yourself, your spouse, or your dependents who are enrolled in postsecondary education. You can use this credit every year an eligible family member attends school to reduce your taxable income.
How does the Lifetime Learning Credit work?
The Lifetime Learning Credit is a tax credit, which can be more impactful than a tax deduction. A credit gives a straight dollar-for-dollar reduction of your total tax bill. For example, if you qualify for a $2,000 tax credit under the LLC, you reduce how much you owe in taxes by $2,000.
A $2,000 tax deduction only reduces your bill by your tax rate. If you're in a 25% tax bracket, a $2,000 deduction reduces how much you owe to the IRS by $500 ($2,000 x 25%). For this reason, the Lifetime Learning Credit can go a long way toward helping pay for the cost of your education.
How much is the Lifetime Learning Tax Credit?
The Lifetime Learning Tax Credit is worth 20% of your eligible education spending up to $10,000 per year. The maximum tax credit available is $2,000 if you spend $10,000 or more on qualified expenses.
You can only claim one Lifetime Tax Credit per tax return. It's not per student. If you or other family members are going to school at the same time and you all have eligible expenses, your maximum tax credit for the year will still be $2,000. You and your spouse cannot file separate tax returns to claim 2 Lifetime Learning Credits. In fact, if you use the married filing separately status for the year, you cannot claim this tax credit.
American Opportunity Tax Credit vs. Lifetime Learning Credit
The American Opportunity Tax Credit (AOTC) is another tax credit for postsecondary school education expenses. The American Opportunity Tax Credit is even more generous than the Lifetime Learning Credit. With the AOTC, the maximum credit goes up to $2,500 per year versus $2,000 with the LLC.
You need less spending to max out too. You max out at just $4,000 per year of expenses versus $10,000 with the LLC. Finally, you can claim the AOTC for multiple students in a year—not limited to one per return like the LLC.
However, the American Opportunity Tax Credit is only available for a student's first 4 years of postsecondary education. If you've completed 4 years of study, you can no longer claim this credit for your education expenses. In addition, you can only claim the AOTC for a student studying for a degree and attending school at least half time. With the Lifetime Learning Credit, you can claim it even if the student takes just one course.
You can only claim one of these tax credits per student. However, you can claim both credits on one tax return if multiple family members attend school. For example, you could use the AOTC for your child going to college while you use the LLC for your professional development expenses.
Who's eligible to claim the Lifetime Learning Credit?
To qualify for the credit, the student must attend class for at least 1 complete academic period during the year. An academic period could be a full semester, quarter, trimester, or however else the school defines its periods. You can't claim the Lifetime Learning Credit if the student quits partway through a class.
The taxpayer cannot claim this credit if they are listed as a dependent on someone else's tax return. For example, if your daughter is a dependent and going to school, you could claim the credit on her behalf, but she could not file a tax return and use the credit herself.
It's also important to know that there are income limits around claiming the LLC, qualified institutions, and qualified educational expenses.
Income limits
Income limits for claiming the Lifetime Learning Tax Credit are based on your modified adjusted gross income (MAGI) for the year. As of 2023, you can claim the full $2,000 Lifetime Learning Credit if you are single with a MAGI of up to $80,000 or married with a joint MAGI of up to $160,000. MAGI is your adjusted gross income (aka your total income minus certain tax credits, adjustments, and deductions), with some of those credits, adjustments, and deductions added back in.
Eligibility for the credit phases out as income rises. For single filers, the phaseout threshold is between $80,000 and $90,000. For married filing jointly, the range is between $160,000 and $180,000. You cannot claim the Lifetime Learning Tax Credit if you are single with a MAGI above $90,000 or married with a joint MAGI above $180,000.
Eligible education institutions
Not every school qualifies for the Lifetime Learning Credit. The school must be eligible to participate in federal student aid under the US Department of Education. Fortunately, this is very broad and includes public and private colleges and universities. It also includes for-profit colleges and universities, as well as vocational schools. If you aren't sure about a particular school, visit IRS.gov for resources.
Qualified educational expenses
You can claim the Lifetime Learning Credit for educational expenses required to attend your school including tuition and school fees. It could also include equipment and supplies that are required to participate in the class. However, it doesn't include books you buy from the bookstore. You also can't claim room and board, transportation, and other living expenses.
How to claim the Lifetime Learning Credit
At the end of the year, the school will send you a 1098-T listing the eligible costs for the Lifetime Learning Credit. If you are eligible to claim this credit, you then fill out IRS Form 8863, listing information about the student and the qualified expenses. Calculate your total tax credit under the LLC and then submit the form with the rest of your return. A tax professional or tax software could help guide you through this process.
Note: If you do have a 529 college plan or Coverdell account, taking more than one tax break per expense is not allowed by the IRS. So it's important to remember that the education expenses you use to claim the LLC can't also be used to make your 529/Coverdell distributions tax-free. To learn more about coordinating tax benefits, read Viewpoints on Fidelity.com: How to spend from a 529 college plan
Is the Lifetime Learning Credit refundable?
Unfortunately, the Lifetime Learning Credit is not refundable. A refundable tax credit can be included with your tax refund from the IRS if your credit is larger than your total tax bill. For example, if your credit is $2,000 but you only owe $1,500 in taxes, you would receive the $500 difference in cash.
With the Lifetime Learning Credit, if your credit exceeds your tax bill, you will not get the rest as part of your refund. As well, the tax credit can't be carried forward to another year to reduce future taxes. On the other hand, the American Opportunity Tax Credit is refundable.
Other ways to save on taxes and higher education
Student loan interest deduction: If you take out student loans to cover the higher education costs, you could deduct up to $2,500 of student loan interest per year.
529 plans: 529 plans allow you to save for future qualified education expenses with tax breaks. You put money into the 529 plan and invest it for the future. You don't get a federal tax deduction for saving through a 529 plan, but some states offer a tax deduction. Your investments delay taxes while in the 529 plan. Your withdrawals are tax-free if you use the money for qualified education expenses.
Read Viewpoints on Fidelity.com: The ABCs of 529 savings plans
Coverdell plans: A Coverdell plan works like a 529 plan. One key difference is that you can use these accounts to pay for all school expenses, from kindergarten and beyond. However, you cannot save through a Coverdell plan if you are single and earn more than $110,000 or are married and earn more than $220,000 combined.
Tax breaks like these can help you manage the rising cost of an education. Consider meeting with a financial professional to help make sure you're taking advantage of the Lifetime Learning Credit and other tax benefits.