Are you saddled with the financial burden of putting yourself or your child through college? Then, you may be able to offset up to $2000 in qualified educational expenses by claiming the Lifetime Learning Credit (LLC).
However, the Lifetime Learning Credit doesn’t apply to just everyone. In fact, there are even certain instances in which claiming the LLC may not be in your best interest.
Needless to say:
With college prices higher now than ever before, you’ll want to make sure that you can save every eligible penny.
At Steven Lissner & Company, we know that your time is valuable. Therefore, our tax experts have condensed the tricky ins and outs of the Lifetime Learning Credit into this easy-to-follow guide. Keep reading below to learn how you can save big on educational expenses…
Every. Single. Tax. Year.
Basic Eligibility Criteria for the Lifetime Learning Credit
First things first, which students qualify for the Lifetime Learning Credit (LLC)? Of all the education tax credits, the LLC has the most permissive criteria.
For example, unlike the American Opportunity Tax Credit (AOTC), all students meeting certain income and enrollment requirements may claim the LLC. This differs markedly from the AOTC, which can be claimed only during the first four years of higher education. (By current definitions, higher education encompasses both postsecondary colleges and universities as well as trade schools.)
This distinction is huge.
As the name implies, it means that the Lifetime Learning Credit services lifetime learners. So, even if you’ve already earned your degree (or maxed out your four years of claiming the AOTC), you can still obtain much-needed financial relief through the LLC.
Sit down with us and crunch the numbers. Most likely, we’ll suggest that you enroll in that summer school session you’ve always wanted to take or sign up for those community college classes to hone your professional skills.
After all, you’ll be refunded 20% of up to the first $10,000 you spend on qualified educational expenses. (That’s a maximum value of $2,000 in tax savings!)
But, wait. There’s some even better news:
Thanks to the Consolidated Appropriations Act of 2020, the new cap for the Lifetime Learning Credit will rise to $2,500 in savings for the 2021 tax year.
Just make sure that the following statements from the IRS apply to you:
– You’re enrolled in an accredited post-secondary institution, such as an undergraduate, graduate, or vocational school.
– You intend to use your enrollment period to earn a degree or eligible credential and/or enhance your professional development.
– You’ll be completing at least one academic session as defined by your institution. (Sessions often include semesters or even shorter units, such as quarters or summer school terms.)
– You meet the basic income requirements outlined below.
Income Requirements for the Lifetime Learning Credit
To determine if you qualify for the Lifetime Learning Credit, you must calculate your Modified Adjusted Gross Income (MAGI).
But, here’s the (not-so-) fun part. The IRS defines your MAGI differently based on the specific tax credit that you’re examining. That’s because your MAGI not only includes your household income, but also adds certain key deductions back in. Needless to say, complex calculations can be a bit daunting.
If you truly want to calculate your MAGI for the 2020 Lifetime Learning Credit, then you must use Worksheet 3-1 from IRS Publication 970.
But, we recommend a much easier alternative. Let one of our experienced tax accountants perform the difficult legwork for you. After all, we calculate MAGIs pretty much every single day…
For the 2020 tax year, the following individuals are eligible for the full Lifetime Learning Credit:
– Single/head of household individuals with MAGIs less than $59,000
– Couples who are married and filing jointly with MAGIs less than $118,000.
Beyond these income levels, we enter into what is known as a phase-out limit. For example, single/head-of-household individuals earning MAGIs between $59,000 – $69,000 can still earn a portion of the Lifetime Learning Tax Credit. But, it won’t be the full amount. Likewise, married and filing jointly couples earning MAGIs between $118,000 and $138,000 are also eligible for a reduced LLC.
After these income thresholds have been passed, filers become ineligible… That is, until the 2021 tax year.
Remember the Consolidated Appropriations Act that we mentioned previously? It expanded the phase-out limits significantly in your favor. In 2021, the new phase-out MAGIs for the LLC will rise to:
– $80,000-$90,000 for single/head-of-house filers
– $160,000 – $180,000 for married and filing jointly individuals
That’s a GIGANTIC shift!
Qualifying Expenses Under the Lifetime Learning Credit
Under the Lifetime Learning Credit, you can claim up to $10,000 in eligible expenses (of which you will receive a tax break for up to $2000 – $2500 depending on the tax year).
But, how exactly does the IRS define a “qualifying” expense?
First and foremost, the Lifetime Learning Credit allows you to claim tuition costs and this is true regardless of whether you attend an in-state or out-of-state institution.
Next, you can claim expenses related to essential materials that you were required to purchase for your classes. This includes those outrageously priced textbooks from the student bookstore, as well as required equipment and supplies.
This is where consulting a trusted tax accountant can come in handy. It’s easy to overlook equipment and supplies that fall off your radar.
The following list includes some commonly overlooked items that you may wish to claim:
– Laptops, computers, and related hardware
– Software programs
– Internet access
– Essential lab equipment (e.g. safety gogles)
– Supplies required for art classes for art majors
– And more!
Lastly, the IRS also allows you to claim required student-activity fees that your institution may have bundled up in its tuition expenses. This can be a huge tax break, as studies have shown that these fees can account for up to 16% of total expenses for in-state students!
Where do these fees go exactly? Unfortunately, there isn’t a lot of transparency. So, if you were forced to pay mysterious student-activity fees that went… somewhere… here is your chance to recoup them.
Expenses that Don’t Qualify for the Lifetime Learning Credit
If you’ve attended a higher education institution, then you know that there are a ton of hidden costs involved. Unfortunately, the IRS doesn’t recognize many of these under the Lifetime Learning Credit.
Don’t make the mistake of attempting to claim the following:
– Room and board
– Meals or meal plan fees
– Transportation costs (such as bus fares) to attend classes
– Student health insurance or medical expenditures
– Childcare expenses (You can deduct these elsewhere.)
– Classes or program fees that involve hobbies (e.g. bowling, gaming, sports, etc.)
– Classes that don’t confer any credits
In addition, make sure that you don’t claim any eligible expenses (outlined in the previous section) in more than one credit or deduction. If money is tight—as it often is for new grads—you don’t want to receive a costly bill from the IRS at a later date.
Take our word for it: We’ve assisted many well-intentioned clients through tax audits who made the simple error of double-dipping on tax credits/deductions when filing through automated tax services instead of consulting a qualified CPA.
Claiming the AOTC vs. the LLC
But, there is one catch. You can’t claim the American Opportunity Tax Credit (AOTC) in the same tax year that you claim the Lifetime Learning Credit (LLC).
So, which tax credit should you claim first?
Always claim the AOTC credit when you can—particularly, for the 2020 tax year. Remember: The AOTC only applies during the first four years of your post-secondary education. After that point, you can only qualify for the Lifetime Learning Credit.
This reason aside, the maximum AOTC credit for the 2020 tax year is $2,500 compared to the $2,000 maximum tax credit offered under the Lifetime Learning Credit. Likewise, the phase-out thresholds for the AOTC are much higher than those for the LLC:
We’re talking nearly $20,000 higher for individuals and nearly $40,000 higher for couples who are married and filing jointly.
Of course, these differences will evaporate during the 2021 tax year. The Consolidated Appropriations Act bumped up the tax reimbursement and phase-out limits for the LLC to match the current levels of the AOTC.
Despite this, we still recommend that you take the AOTC first—even in 2021. Only time will tell how the tax laws will change, but you’re only eligible for the AOTC during the first four years of your higher education. If you choose not to claim the AOTC in a given year, unfortunately, those eligible years don’t roll over. You’ve simply missed out on an opportunity to use it.
And, just in case you were wondering: Yes! Multiple eligible individuals in the same household (e.g. you, your spouse, and all of your dependents) can each claim one tax credit during a given year. Simply multiply your savings by the number of eligible individuals for each tax credit!
Why All of This Matters
To put it simply, higher education costs aren’t going to go down anytime soon.
The average annual cost to attend college during the 2000-2001 school year was $15,381 for in-state students. In the 2018-2019 school year, that value rose to $32,782. Adjusting for inflation, that’s still a whopping 46% increase.
Although there has been a recent movement in the US government to dismiss student loan debt, a divided Congress makes this reality unlikely. In the meantime, we at least still have the AOTC and LLC to fall back on.
Save BIG by Hiring a CPA to Review Your Education Expenses
We’ve already presented some pretty good reasons why you should hire a certified public account to evaluate your educational expenses:
-Modified Adjustable Gross Incomes (MAGIs) are difficult to calculate.
– You don’t want to overlook any hidden savings that fall outside of mainstream internet and word-of-mouth knowledge.
– You want to avoid a costly audit that could lead to the IRS breathing down your neck.
But, we still haven’t mentioned the best reason of all:
To put it bluntly, filing taxes is tedious. You simply don’t want to be cooped up inside, scratching your head and pouring over the numbers on a gorgeous weekend.
Your time is your most valuable asset. At Steven Lissner & Company, our accounting experts give that back to you. We perform all the monotonous legwork so that you can enjoy a stress- free tax season. With over 30 years of experience under our belts, you can rest assured that your biggest tax refund yet awaits you.
To uncover more hidden savings, contact one of our devoted tax specialists today!