Higher education doesn't come cheap. Thankfully, the IRS offers families a bit of a tax break in the form of the Lifetime Learning Credit. It pays to see whether you're eligible to claim this credit on your upcoming return, as doing so could put up to $2,000 back in your pocket.
Tax credits versus tax deductions
As a quick refresher, tax credits tend to be more beneficial than deductions because they reduce your tax liability dollar for dollar. Deductions, by contrast, simply reduce the amount of your income that's subject to taxes.
For example, if you're eligible for a $2,000 tax credit, you'll get to subtract $2,000 from what you owe the IRS, thus saving yourself that $2,000 in full. If you get a $2,000 deduction, you'll get to exempt that amount of income from taxes, but if your effective tax rate is 25%, that deduction will only translate into $500 of tax savings. Of course, you can claim both credits and deductions as long as you're eligible, and the more you rack up, the less tax you'll pay.
The Lifetime Learning Credit
The IRS offers a number of tax breaks for students, one of which is the Lifetime Learning Credit. If you're able to claim it, you might get up to $2,000 back on your taxes this year. Specifically, the credit is calculated as 20% of the first $10,000 you incur in qualified tuition and related expenses, such as mandatory student fees, books, supplies, and equipment for studies.
IMAGE SOURCE: GETTY IMAGES.
To qualify for the Lifetime Learning Credit, the eligible student (whether it's you, a spouse, or a dependent) will need to meet these criteria:
- The student must be enrolled at an eligible educational institution
- The purpose of enrollment must be to obtain a degree or similar credential, get a job, or improve job skills
- The student must be enrolled for at least one academic period per tax year, which is defined as either a semester, trimester, quarter, or any period of study as determined by the institution in question
Confused yet? There's no need to be. While the IRS imposes a number of rules around the Lifetime Learning Credit, it's actually fairly easy to qualify -- as long as you don't earn too much money. As is the case for most tax credits, higher earners can't claim the Lifetime Learning Credit. Eligibility begins to phase out for single tax filers whose modified adjusted gross income (MAGI) is $55,000, and it goes away completely with a MAGI of $65,000. For married couples filing jointly, eligibility starts phasing out at $110,000 and disappears at $130,000.
One other thing you should know about the Lifetime Learning Credit is that it's non-refundable, which means the most it can do is reduce your tax liability to $0. If you start out owing no money on your taxes and apply the full $2,000 credit on top of that, you, unfortunately, will not get a check for the difference.
You can't double dip
The Lifetime Learning Credit is only one of several tax breaks available to students or those paying for higher education, but claiming other credits or deductions could render you ineligible for it. For example, single tax filers earning less than $80,000, and joint filers earnings less than $160,000, can take a tax deduction of up to $4,000 for tuition and fees, but if you're claiming that deduction, you can't get the Lifetime Learning Credit for the same student during the same tax year.
Furthermore, there's another credit called the American Opportunity Tax Credit that could save you up to $2,500 per year, per student. But if you claim that credit for a given student, you can't claim the Lifetime Learning Credit for that same student as well.
If you're facing higher education expenses this year, it pays to see whether you're eligible for the Lifetime Learning Credit. You have little to lose and up to $2,000 to gain.
