Eligibility for the Lifetime Learning Credit
The Lifetime Learning Credit is one of the more attractive tax breaks relating to education, but you must qualify for it. The student must be you, your spouse or another dependent you're claiming on your return. He must attend school for at least one academic period during the tax year, which typically means a semester. (As of the time of publication, your modified adjusted gross income must be no more than $54,000, or $108,000 if you're married and file a joint return, to claim the entire available credit. These income limits are adjusted periodically for inflation. If your MAGI is between $54,000 and $64,000, or double that for those who are married and file jointly, you can claim a portion of the credit. If your income is over $64,000, or $128,000 for those filing jointly, you're not eligible to claim the LLC.
Calculating the Amount of the Credit
Students receive IRS Form 1098-T from their learning institutions no later than January 31, showing what they paid in tuition and related expenses during the previous year. The expenses must be "qualified." This means they're for tuition, fees and the costs of books or supplies necessary for enrollment. Expenses like room, board and transportation aren't qualified. If you're eligible for the full credit, you can calculate it at 20 percent of the first $10,000 that appears on the student's 1098-T. Expenses over $10,000 aren't eligible for the tax credit, so the largest credit you can receive is $2,000. If you pay less in qualified expenses, your credit will be less. For example, if you paid $5,000 toward tuition and fees, your credit would be $1,000, or 20 percent of $5,000, assuming your income qualifies you to take the full 20 percent.
Claiming the Credit
Claiming the Lifetime Learning Credit involves completing IRS Form 8863 and submitting it with your tax return. The credit isn't refundable, so although you can use it to pare down your tax bill, the IRS won't send you a refund check for the balance if there's anything left over. If you're eligible for the full $2,000 credit and you owe $1,000 in taxes, the IRS gets to keep the remaining $1,000. A tax credit is still better than a tax deduction, however, even when it's non-refundable. A deduction only reduces the income on which you must pay taxes.
Just One Education Credit or Deduction
The IRS doesn't permit double-dipping with regard to education-related tax breaks. You can't take more than one credit or deduction -- you must choose the one that's most beneficial to you. The tuition and fees deduction is another choice you might consider claiming if you're not eligible for the LLC. If you're married, you must file a joint return with your spouse to claim this deduction, just as you would if you could claim the LLC instead. If you're the student, you can't claim the tuition and fees deduction on your own return if you're someone else's dependent, which also is the case with the tax credit. The deduction is worth up to $4,000 -- twice that of the Lifetime Learning Credit -- depending on how much you spent on tuition and fees. But it's a deduction, not a credit, so all it can do is reduce your taxable income.