Last month we covered the more valuable of the two education tax credits, the American Opportunity Credit (AOC), which is used for the first four years of post-secondary education. The other education credit, the Lifetime Learning Credit, does not have a limit on how many tax years it may be taken, but there are some differences with how it is calculated compared to the AOC.

With the AOC, a student had to be at least a halftime student in a degree granting program to be eligible for the credit. For the Lifetime Learning Credit, all post-secondary coursework, including non-degree granting programs, and courses at eligible institutions used to acquire or improve job skills qualifies for the tax credit. Therefore, if you take and pay for one course per semester you would qualify for this credit.

The Lifetime Learning Credit is calculated by multiplying all eligible tuition and fees (not paid by grants and scholarships) by twenty percent yielding a maximum tax credit of $2,000. If you paid $10,000 or more for tuition and fees, you would receive the maximum credit per student per tax year. Payment may be through cash, credit, parent loans, student loans and gifts. Unlike the AOC, most textbook and classroom material purchases are not qualified education expenses for the Lifetime Learning Credit.

Who gets to take the credit on their tax return? All education credits are taken by the person who can claim the student as a dependent on their income tax return. The impact of the Lifetime Learning Credit on your tax return depends on your personal situation. You have to have a tax liability in order to take advantage of the Lifetime Learning Credit. There is not a refundable portion of this credit as there is with the AOC. There are also income limits for taking the credit. If your modified adjusted gross income is $128,000 or more for “married filing joint” status, or $64,000 for “single or head of household” status, the credit is not available. The AOC has higher income limits which are $180,000 and $90,000, respectively.

An alternative to the education credit for those in a high tax bracket is the “Tuition and Fees Deduction” which allows up to $4,000 of eligible tuition and fees, paid by you or your spouse, as a reduction to adjusted gross income. You cannot take both the credit and the tuition and fees deduction for the same student. Your tax preparer will determine which one is optimal.

A reminder to parents: make sure your dependent student files their taxes properly. We had a parent’s e-filed return get rejected by the IRS because their dependent student, with minimal wages and no tax liability, had claimed themself and the education credit. Ouch! The parent’s return is now on extension while they wait for their student’s amended tax return to be processed by the IRS and New York State.