Death & Taxes

The Lifetime Learning Credit

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By Roy Lewis

The HOPE credit allows qualified taxpayers to take up to a $1,500 tax credit for the payment of qualified education expenses incurred for the first two years of undergraduate education at an eligible educational institution. The Lifetime credit has many similarities, but a few major differences. I would strongly urge you to read the HOPE credit article to gain more insight into some of the definitions and requirements that apply to both credits.

The Similarities:

• The school or college must be an eligible educational institution (including certain vocational schools).

• The credits are available only for qualified tuition and related expenses of an eligible student.

• The credits aren't allowed for an expense that was claimed as an education deduction, and cannot be claimed in a year when the student receives any tax-exempt distribution from an education IRA.

• The credits cannot both be claimed in the same tax year for the same expenses. But, each credit can be claimed for different expenses for different students.

• Neither credit is refundable, but either credit can be used to reduce both your regular tax and your Alternative Minimum Tax.

• The credits are not available for taxpayers who are married filing separately, or for an individual who can be claimed as a dependent on another's return.

• Both credits are phased out ratably for married taxpayers filing jointly with adjusted gross income (AGI), with certain modifications, between $80,000 and $100,000. For taxpayers who aren't married filing jointly, the phase-out range is $40,000 to $50,000. After 2001, the phase-out amounts will be adjusted for inflation.

The Differences:

So much for the similarities, there are a number of significant differences between the HOPE and Lifetime credits. Let's look:

• The Lifetime credit covers qualified education expenses paid after June 30, 1998. In addition, these expenses must be paid for academic periods beginning after June 30, 1998. (For additional information on how the "academic period" restriction works, check out the article on the HOPE credit).

• The taxpayer can claim a Lifetime credit equal to 20% of up to $5,000 in qualifying tuition and related expenses. This credit applies to qualified expenses paid by the taxpayer for himself, his spouse, or any dependent. Therefore, the maximum Lifetime credit that can be claimed is $1,000 (20% of $5,000).

  Starting in 2003, the maximum amount of qualified tuition and expenses that can be used to determine the Lifetime credit for a tax year will increase to $10,000. So, after year 2002, the maximum credit will be $2,000 (20% of $10,000). You should know that these expense limits will not be indexed for inflation.

• While the HOPE credit is only available to students in the first two years of post-secondary years of education, the Lifetime credit is available to all qualified students. The Lifetime credit (as the name implies) is available for all qualified education.

• There is no limit on the number of years for which the Lifetime credit can be claimed.

• While the HOPE credit has a "half-time" enrollment requirement, the Lifetime credit does not. The Lifetime credit is available for the cost of courses at an eligible educational institution, regardless whether the student is on a full-time, half-time, or less-than-half-time basis.

• The Lifetime credit is available to either acquire or improve the student's job skills.

• The maximum amount of the Lifetime credit that can be claimed on a taxpayer's return doesn't vary based on the number of students in the taxpayer's family. Therefore, unlike the HOPE credit (which is computed on a per-student basis), the Lifetime credit is computed on a per-family basis. Let's look at an example.

  Example: Jack and Jill are married, with AGI of $35,000. They pay $5,000 in tuition and expenses for Jack, and also pay $2,000 in tuition and expenses for Jill. If they qualified for the HOPE credit, they could claim a credit of $1,500 each for Jack and Jill, for a total HOPE credit of $3,000. But, if they don't qualify for the HOPE credit, their maximum Lifetime credit would amount to only $1,000 ($2,000 after 2002), even if they both meet the eligibility requirements and have qualifying expenses. This is because, for Lifetime credit purposes, the credit is determined on a per-family basis, and not on a per-student basis.

• As you might remember, the HOPE credit is denied to any individual who has ever been convicted of a federal or state felony drug offense. There is no such denial for the Lifetime credit. Why? I have no idea. It's just one of the beautiful things about tax "simplification."

Finally, as with the HOPE credit, there are a number of technical requirements for the Lifetime credit that are not discussed above. For additional information, you might want to check with your local education institution. And, as always, if you have any questions on any of the more technical aspects of the HOPE and Lifetime credits, you can post 'em in the Tax Strategies discussion board.