Over the last couple of weeks, we talked about the American Opportunity Tax Credit. This week I want to continue to expand on that credit and finally talk about the Lifetime Learning Credit. Click the play button below to listen in.

Script:

We left off last talking about planning for someone who is above the income limits.

Correct. There is some planning that can be done for those with income over $90k single and $180k married. If above these levels, the parents cannot claim the credits. It doesn’t mean that the child can’t claim the credits.

If the parents are phased out and cannot claim the credit, the child is able to claim the credit on their returns as long as:

  • They have taxable income (which means they have income over the $12k standard deduction)
  • Credit can only offset tax – no refundable portion
  • Parents cannot claim the student as a dependent and the student cannot claim themselves.

This is a really good option for those students with summer jobs, working for a parent’s company, paid internships, etc. The student is able to offset their tax with the credit that the parents are not eligible for.

What about the Lifetime Learning Credit?

This is the second credit that can be available.

  • This is a credit that can be taken after you have exhausted the four-year American Opportunity Tax Credit period.
  • Credit is 20% of the first $10,000 of expenses or a maximum of $2,000 per year.
  • Unlike the American Opportunity Tax Credit, there is no refundable portion. This can only offset tax.

Is this also a popular credit?

Yes, especially with students staying in college longer, it is a credit that can benefit a parent or a student in their final years/in their fifth year. It can also be used for those going back to college for a second degree. It may be used for courses to get or improve a job skill.

Are the income phase-out limits similar to the other education credits?

There are limits, yes. For the other credit, the limits were fairly high at $90k for a single and $180k for a married couple. With this particular credit, it’s about $58k to $68k single and $116k to $136k for a married couple. That’s how much income you can earn before the credit is totally phased out.

Anything else we should know?

Yes, there is. Similar to the rules for the American Opportunity Tax Credit, any expenses that are reimbursed through your 529 plan cannot be used for this credit.

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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