One resource students and their families use to offset the cost of higher education is the lifetime learning credit.
This tax credit, which is worth up to $2,000 per tax return, helps eligible filers pay for qualified undergraduate, graduate and professional degree instruction.
While it's not considered as generous as the American opportunity tax credit, it is somewhat more flexible and can be claimed for an unlimited number of years.
Here's what to know about the lifetime learning credit.
What Is the Lifetime Learning Credit?
The lifetime learning credit is a tax credit for filers who paid eligible tuition and expenses at qualified educational institutions or universities during the tax year. The credit is worth up to 20% of the first $10,000 of eligible expenses, or $2,000, and can be used for an unlimited number of years, meaning it's the tax credit often available for filers who pay graduate school or professional degree expenses. "You can use it forever," says Miklos Ringbauer, certified public accountant and principal at MiklosCPA, based in Los Angeles.
The lifetime learning credit is likely the credit you would claim if you paid out-of-pocket expenses for a master's degree or sought out a professional certificate. It is claimed per tax return, not per student, like the American opportunity tax credit.
Who Can Claim the Lifetime Learning Credit?
The lifetime learning credit is generally "for people who are not eligible for the American opportunity tax credit because they've already used up their four tax years," says Eva Rosenberg, a Los Angeles-based enrolled agent and founder of TaxMama.com. "So they can use this for practically any kind of education."
To claim the LLC, you must meet several requirements:
-- You, your dependent or a third party must pay qualified higher education expenses.
-- The expenses must be incurred at an eligible institution, which is one that can provide federal student financial aid.
-- The student attending the program is you, a spouse or dependent on your tax return.
What does it mean if a "third party" pays your qualified expenses? It's a little complicated, but in this case, if qualified education expenses for a dependent are paid by a third party, they're considered paid by the person listing that dependent on his or her tax return. So if a grandparent pays for higher education expenses but the student is a dependent on her parent's tax return, the parent may still be able to claim the credit for those costs, says Chris D. Hardy, a certified financial planner, enrolled agent and director of planning and investments at Paramount Investment Advisors in Suwanee, Georgia.
You cannot claim the lifetime learning credit if you're listed as a dependent on another person's tax return or if you file taxes as married fling separately. You also can't claim another higher education benefit using the same student or expenses.
You lose the ability to claim the full lifetime learning credit if your modified adjusted gross income exceeds certain "phase out" amounts. For 2019, those amounts are $116,000 to $136,000 for taxpayers who file as married filing jointly and $58,0000 to $68,000 for single filers. Between those amount, you lose the ability to claim the full credit. If you earn a MAGI above those amounts, the LLC is unavailable to you.
[Read: What's My Tax Bracket?]
How Much Is the Lifetime Learning Credit Worth?
The LLC is worth 20% of the first $10,000 of eligible education expenses, or $2,000 per tax year. It's a nonrefundable tax credit, meaning it can bring your tax liability to zero but cannot generate a refund.
Generally, the American opportunity tax credit is considered more valuable since it's worth up to $2,500 and is a refundable tax credit, which means it can create a refund of up to $1,000. But the AOTC is only available for the first four years of college, while the lifetime learning credit is claimable for education beyond a traditional four-year degree, including graduate degrees and professional development courses taken at qualified institutions.
Remember that a tax credit reduces your tax liability dollar for dollar and is generally more valuable than a tax deduction, which reduces your taxable income.
What Expenses Are Covered Under the Lifetime Learning Credit?
Generally, tuition, fees and required expenses for attending an eligible institution count when using this credit. "The lifetime learning credit is more expansive," Hardy says. "You don't have to be pursuing a degree. It could be for general education purposes that help you in your employment."
Room and board, insurance and transportation are not covered by the LLC.
If you use a 529 college savings account, employer educational reimbursement, a scholarship or other tax-free funds, you cannot claim a credit for those expenses. Utilizing those financial vehicles still may be more valuable, however, than the credit, so it's worth doing the math. "Getting a dollar-for-dollar reimbursement is much better than getting a 20% tax credit," Rosenberg says.