3.   Lifetime Learning Credit

Table of Contents

Introduction

For 2011, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American opportunity credit and the lifetime learning credit. This chapter discusses the lifetime learning credit. The American opportunity credit is discussed in chapter 2, The American Opportunity Credit .

This chapter explains:

  • Who can claim the lifetime learning credit,

  • What expenses qualify for the credit,

  • Who is an eligible student,

  • Who can claim a dependent's expenses,

  • How to figure the credit,

  • How to claim the credit, and

  • When the credit must be repaid.

What is the tax benefit of the lifetime learning credit.   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. There is no limit on the number of years the lifetime learning credit can be claimed for each student.

  A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. The lifetime learning credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you.

  Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax.

You can choose the education benefit that will give you the lowest tax. You may want to compare the tuition and fees deduction (chapter 6, Tuition and Fees Deduction) to either of the education credits.

Can you claim more than one education credit this year.   For each student, you can elect for any year only one of the credits. For example, if you elect to take the lifetime learning credit for a child on your 2011 tax return, you cannot, for that same child, also claim the American opportunity credit for 2011.

  If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.

  If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year.

Differences between the American opportunity and lifetime learning credits.   There are several differences between these two credits. For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope credit was claimed counts toward the 4 years. However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2011 near the end of this publication.

Overview of the lifetime learning credit.   See Table 3-1, Overview of the Lifetime Learning Credit , for the basics of the lifetime learning credit. The details are discussed in this chapter.

Can You Claim the Credit

The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return.

Who Can Claim the Credit

Generally, you can claim the lifetime learning credit if all three of the following requirements are met.

  • You pay qualified education expenses of higher education.

  • You pay the education expenses for an eligible student.

  • The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

Table 3-1.Overview of the Lifetime Learning Credit

Maximum credit Up to $2,000 credit per return
Limit on modified adjusted gross income (MAGI) $122,000 if married filling jointly;  
$61,000 if single, head of household, or qualifying widow(er)
Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income
Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills
Number of tax years credit available Available for an unlimited number of years
Type of degree required Student does not need to be pursuing a degree or other recognized education credential
Number of courses Available for one or more courses
Felony drug conviction Felony drug convictions are permitted
Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment)
Payments for academic periods Payments made in 2011 for academic periods beginning in 2011 or beginning in the first 3 months of 2012

Note.

Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you.

“Qualified education expenses” are defined later under Qualified Education Expenses . “Eligible students” are defined later under Who Is an Eligible Student . A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses .

You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2011 , later, helpful in determining if you can claim a lifetime learning credit on your tax return.

Who Cannot Claim the Credit

You cannot claim the lifetime learning credit for 2011 if any of the following apply.

What Expenses Qualify

The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for qualified education expenses paid in 2011 for an academic period beginning in 2011 or in the first 3 months of 2012.

For example, if you paid $1,500 in December 2011 for qualified tuition for the spring 2012 semester beginning in January 2012, you may be able to use that $1,500 in figuring your 2011 credit.

Academic period.   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.

Paid with borrowed funds.   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.

Student withdraws from class(es).   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws.

Qualified Education Expenses

For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.

Eligible educational institution.   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

  Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

Related expenses.   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for the enrollment or attendance.

In the following examples, assume that each student is an eligible student at an eligible educational institution.

Example 1.   Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense.

Example 2.   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution.

Example 3.    When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified expense.

No Double Benefit Allowed

You cannot do any of the following:

  • Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses.

  • Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student.

  • Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses.

  • Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program.

  • Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. See Adjustments to Qualified Education Expenses, next.

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Figure 3-1

Adjustments to Qualified Education Expenses

If you pay qualified education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refund(s) you received.

Tax-free educational assistance.   This includes:

Refunds.   Qualified education expenses do not include expenses for which you or someone else receives a refund. (For information on expenses paid by a dependent student or third party, see Who Can Claim a Dependent's Expenses , later.)

  If a refund of expenses paid in 2011 is received before you file your tax return for 2011, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2011 tax return, see When Must the Credit Be Repaid (Recaptured) , later.

  You are considered to receive a refund of expenses when an eligible educational institution refunds loan proceeds to the lender on behalf of the borrower. Follow the above instructions according to when you are considered to receive the refund.

Amounts that do not reduce qualified education expenses.   Do not reduce qualified education expenses by amounts paid with funds the student receives as:

  • Payment for services, such as wages,

  • A loan,

  • A gift,

  • An inheritance, or

  • A withdrawal from the student's personal savings.

  Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.

  • The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.

  • The use of the money is not restricted.

For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit.

Expenses That Do Not Qualify

Qualified education expenses do not include amounts paid for:

  • Insurance,

  • Medical expenses (including student health fees),

  • Room and board,

  • Transportation, or

  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

Sports, games, hobbies, and noncredit courses.   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify.

Comprehensive or bundled fees.   Some eligible educational institutions combine all of their fees for an academic period into one amount. If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. See Figuring the Credit , later, for more information about Form 1098-T.

Who Is an Eligible Student

For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier).

Who Can Claim a Dependent's Expenses

If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year.

For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c.

IF you... THEN only...
claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. The dependent cannot claim the credit.
do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. You cannot claim the credit based on this dependent's expenses.

Expenses paid by dependent.   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of your lifetime learning credit.

  
Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent.

Expenses paid by you.   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit.

Expenses paid by others.   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.

Example.

In 2011, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself.

Unless an exemption for Todd is claimed on someone else's 2011 tax return, only Todd can use the payment to claim a lifetime learning credit.

If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2011 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit.

Tuition reduction.   When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.

Figuring the Credit

The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. The maximum amount of lifetime learning credit you can claim for 2011 is $2,000 (20% × $10,000). However, that amount may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit , later.

Example.

Bruce and Toni Harper are married and file a joint tax return. For 2011, their MAGI is $75,000. Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. She already has a bachelor's degree in history and wants to become a nurse. In August 2011, Toni paid $5,000 of qualified education expenses for her fall 2011 semester. Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2011 joint tax return.

Form 1098-T.   To help you figure your lifetime learning credit, you should receive Form 1098-T. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2012. An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you actually paid. When figuring the credit, use only the amounts you paid or were deemed to have paid in 2011 for qualified education expenses.

  In addition, your Form 1098-T should give you other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether you were enrolled at least half-time or were a graduate student.

   The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number.

Effect of the Amount of Your Income on the Amount of Your Credit

The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $51,000 and $61,000 ($102,000 and $122,000 if you file a joint return). You cannot claim a lifetime learning credit if your MAGI is $61,000 or more ($122,000 or more if you file a joint return).

Modified adjusted gross income (MAGI).   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.

MAGI when using Form 1040A.   If you file Form 1040A, your MAGI is the AGI on line 22 of that form.

MAGI when using Form 1040.   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any:

  1. Foreign earned income exclusion,

  2. Foreign housing exclusion,

  3. Foreign housing deduction,

  4. Exclusion of income by bona fide residents of American Samoa, and

  5. Exclusion of income by bona fide residents of Puerto Rico.

You can use Worksheet 3-1 to figure your MAGI.

Worksheet 3-1.MAGI for the Lifetime Learning Credit

1. Enter your adjusted gross income  
(Form 1040, line 38) 		  1.  
2. Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2.      
3. Enter your foreign housing deduction (Form 2555, line 50)   3.      
4. Enter the amount of income from Puerto Rico you are excluding   4.      
5. Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5.      
6. Add the amounts on 
lines 2, 3, 4, and 5 		  6.  
7. Add the amounts on lines 1 and 6.  
This is your modified adjusted  
gross income. Enter this amount  
on Form 8863, line 18 		  7.  
Phaseout.   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 15-23 of Form 8863. The same method is shown in the following example.

Example.

You are filing a joint return with a MAGI of $112,000. In 2011, you paid $6,600 of qualified education expenses.

You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). The result is a $1,320 (20% x $6,600) tentative credit.

Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. The numerator of the fraction is $122,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator is $20,000, the range of incomes for the phaseout ($102,000 to $122,000). The result is the amount of your phased out (reduced) lifetime learning credit ($660).

  $1,320 × $122,000 − $112,000 
$20,000 		= $660  

Claiming the Credit

You claim the lifetime learning credit by completing Parts II and IV of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 49, or Form 1040A, line 31. A filled-in Form 8863 is shown at the end of this chapter.

When Must the Credit Be Repaid (Recaptured)

If, after you file your 2011 tax return, you or someone else receives tax-free educational assistance for, or a refund of, an expense you used to figure a lifetime learning credit on that return, you may have to repay all or part of the credit. You must refigure your lifetime learning credit for 2011 as if the assistance or refund was received in 2011. Next, you must refigure your tax liability using the revised lifetime learning credit. The increased tax liability is the amount you must repay. Add the repayment (recapture) to your tax liability for the year in which you receive the assistance or refund. See the instructions for your tax return for that year to find out how to report the recapture amount. Your original 2011 tax return does not change.

Example.

You paid $9,300 tuition and fees in December 2011, and your child began college in January 2012. You filed your 2011 tax return on February 15, 2012, and claimed a lifetime learning credit of $1,860. You claimed no other tax credits. After you filed your return, your child dropped two courses and you received a refund of $2,900. You must refigure your 2011 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. The refigured credit is $1,280. The increase to your tax liability is $580. See the instructions for your 2012 income tax return to determine where to include this tax.

Illustrated Example

Judy Green, a single taxpayer, is taking courses at a community college to be recertified to teach in public schools. Her MAGI is $27,000. Her tax, before credits, is $2,234. She claims no credits other than the lifetime learning credit. In July 2011 she paid $700 for the summer 2011 semester; in August 2011 she paid $1,900 for the fall 2011 semester; and in December 2011 she paid another $1,900 for the spring semester beginning January 2012. She received Form 1098-T (shown later) from the college. Judy and the college meet all the requirements for the lifetime learning credit. She can use all of the $4,500 tuition she paid in 2011 when figuring her credit for her 2011 tax return. She figures her credit as shown on the filled-in Form 8863, later.

Note.

In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return.

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Filled-in Form 1098-T Green

Credit Limit Worksheet—Form 8863, Line 23

Nonrefundable lifetime learning credit
1. Enter the amount from Form 8863, line 22 1. 900
2. Enter the amount from Form 1040, line 46, or Form 1040A, line 28   2. 2,234    
3. Enter the total, if any, of your credits from:          
  • Form 1040, lines 47, 48, and the amount from Schedule R entered on line 53
Right brace
 3. 0    
  • Form 1040A, lines 29 and 30    
4. Subtract line 3 from line 2 4. 2,234
5. Nonrefundable lifetime learning credit. Enter the smaller of line 1 or line 4 5. 900
Nonrefundable American opportunity credit
6. Enter the amount from Form 8863, line 15 6. 0
7. Enter the amount from Form 1040, line 46, or Form 1040A, line 28   7.      
8. Enter the total, if any, of your credits from:          
  • Form 1040, lines 47, 48, and the amount from Schedule R entered on line 53, and the amount from line 5 above
Right brace
 8. 0    
  • Form 1040A, lines 29 and 30, and the amount from line 5 above    
9. Subtract line 8 from line 7 9.  
10. Nonrefundable American opportunity credit. Enter the smaller of line 6 or line 9 10. 0
11. Nonrefundable education credits. Add line 5 and line 10. Enter here and on Form 8863, line 23 11. 900

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Form 8863 for Judy Green

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Form 8863 (page 2) for Judy Green

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