Lifetime Learning Credit
Questions and Answers
Current as of 1/98. Note that there have been changes to some of the items below in the technical corrections bill of 1998.
Introduction
Beginning on July 1, 1998, taxpayers may be eligible to claim a nonrefundable Lifetime Learning Credit against their federal income taxes. The Lifetime Learning Credit may be claimed for the qualified tuition and related expenses of the students in the taxpayer’s family (i.e., the taxpayer, the taxpayer's spouse, or an eligible dependent) who are enrolled in eligible educational institutions. Through 2002, the amount that may be claimed as a credit is equal to 20 percent of the taxpayer’s first $5,000 of out-of-pocket qualified tuition and related expenses for all the students in the family. After 2002, the credit amount is equal to 20 percent of the taxpayer's first $10,000 of out-of-pocket qualified tuition and related expenses. Thus, the maximum credit a taxpayer may claim for a taxable year is $1,000 through 2002 and $2,000 thereafter. These amounts are not indexed for inflation.
If the taxpayer is claiming a Hope Scholarship Credit for a particular student, none of that student’s expenses for that year may be applied toward the Lifetime Learning Credit. The amount a taxpayer may claim as a Lifetime Learning Credit is gradually reduced for taxpayers who have modified adjusted gross income between $40,000 ($80,000 for married taxpayers filing jointly) and $50,000 ($100,000 for married taxpayers filing jointly). Taxpayers with modified adjusted gross income over $50,000 ($100,000 for married taxpayers filing jointly) may not claim a Lifetime Learning Credit. The modified adjusted gross income limitation will be indexed for inflation in 2002 and years thereafter. The definition of modified adjusted gross income is the same as it is for purposes of the Hope Scholarship Credit. (See Q&A6 below.)
The Lifetime Learning Credit may be claimed for payments of qualified tuition and related expenses made on or after July 1, 1998, for academic periods beginning on or after July 1, 1998. Therefore, the first time taxpayers will be able to claim the credit will be when they file their 1998 tax returns in 1999. The Lifetime Learning Credit is not available for any amount paid in 1997.
Questions and Answers
Q.1. Who may claim the Lifetime Learning Credit?
A.1. An individual paying qualified tuition and related expenses at a postsecondary
educational institution may claim the credit, provided the institution is an eligible
educational institution. Unlike the Hope Scholarship Credit, students are not required to
be enrolled at least half-time in one of the first two years of postsecondary education.
Nonresident aliens generally are not eligible to claim the Lifetime Learning Credit. (See
Q&A7 below.)
Q.2. May an individual claim a Lifetime Learning Credit for
paying qualified tuition and related expenses for other family members?
A.2. Yes. An individual may claim the credit for his/her own qualified tuition and related
expenses and the qualified tuition and related expenses of his/her spouse and other
eligible dependents (including children) for whom the dependency exemption is allowed.
Generally, a parent may claim the dependency exemption for his/her unmarried child if: (1)
the parent supplies more than half the child’s support for the taxable year, and (2)
the child is under age 19 or is a full-time student under age 24.
Q.3. What are the eligibility requirements for the
institution?
A.3. They are the same requirements that apply for the Hope Scholarship Credit.
Q.4. Is the Lifetime Learning Credit available for a
student taking only one course?
A.4. Yes. For example, a student who has just graduated from high school and is taking a
single course at a community college may claim the Lifetime Learning Credit if the student
comes within the income limits and is not claimed as a dependent by someone else.
Q.5. Are qualified tuition and related expenses for
graduate-level education eligible for the Lifetime Learning Credit?
A.5. Yes.
Q.6. May an individual claim a Lifetime Learning Credit for
more than one family member?
A.6. Yes. However, unlike the Hope Scholarship Credit, the Lifetime Learning Credit is
calculated on a per family, rather than a per student, basis. Therefore, the maximum
available credit does not vary with the number of students in the family. For example, if
in 1999 a married individual whose modified adjusted gross income is $35,000 pays $5,000
of qualified tuition and related expenses to attend an eligible educational institution,
the individual may claim a $1,000 Lifetime Learning Credit. If in the same year the
individual also pays another $2,000 in qualified tuition and related expenses for his
spouse to attend an eligible educational institution, the individual’s Lifetime
Learning Credit is still $1,000.
Q.7. May both the parent and a dependent child claim the
Lifetime Learning Credit for the child’s qualified tuition and related expenses in
the same year?
A.7. No. Either the parent or the child, but not both, may claim the credit for the
child’s expenses in a particular year. If an individual claims the child as a
dependent on his/her Federal income tax return for the year, only the individual may claim
the Lifetime Learning Credit for the child’s qualified tuition and related expenses.
If no one claims the child as a dependent on a Federal income tax return for the year,
only the child may claim the Lifetime Learning Credit for the child's expenses.
Q.8. How does a parent claim a Lifetime Learning Credit for
the qualified tuition and related expenses of a dependent child?
A.8. The parent may claim the credit on his/her Federal income tax return even if the
child files his/her own tax return. When a child is claimed as a dependent on the parent's
return, any qualified tuition and related expenses paid by the child during the year are
treated as if the parent had paid them and, therefore, are included in calculating the
parent’s Lifetime Learning Credit. A child may not claim a Lifetime Learning Credit
on his/her tax return for any year if the child’s parent claims the child as a
dependent in that same year. Also, a married taxpayer who does not file a joint return is
not eligible to claim the Lifetime Learning Credit.
Q.9. What is the maximum Lifetime Learning Credit a
taxpayer may claim?
A.9. The credit is equal to 20 percent of the taxpayer’s out-of-pocket expenses for
qualified tuition and related expenses of all eligible family members, up to a maximum of
$5,000 in expenses annually through 2002. Thus, the maximum Lifetime Learning Credit a
taxpayer may claim through 2002 is $1,000. After 2002, the credit is equal to 20 percent
of the taxpayer’s out-of-pocket expenses up to a maximum of $10,000 in expenses.
Thus, the maximum Lifetime Learning Credit a taxpayer may claim after 2002 is $2,000. The
maximum credit does not change even if the taxpayer is claiming a credit for the expenses
of more than one student in the family.
Q.10. What does the term qualified tuition and related
expenses mean for purposes of the Lifetime Learning Credit?
A.10. The term "qualified tuition and related expenses" for purposes of the
Lifetime Learning Credit has the same meaning as it does for purposes of the Hope
Scholarship Credit.
Q.11. If a student (who is not claimed as a dependent on
anyone’s Federal income tax return) pays qualified tuition and related expenses using
a combination of a Pell Grant, a loan, a gift from a family member, and some personal
savings, what expenses may be taken into account in calculating the Lifetime Learning
Credit the student may claim?
A.11. The student may take into account only out-of-pocket expenses in calculating the
Lifetime Learning Credit. Qualified tuition and related expenses paid with the
student’s earnings, a loan, a gift, an inheritance, or personal savings (including
savings from a qualified state tuition program) are taken into account in calculating the
credit amount. However, qualified tuition and related expenses paid with a Pell Grant or
other tax-free scholarship, a tax-free distribution from an Education IRA, or tax-free
employer-provided educational assistance are not taken into account in calculating the
credit amount.
Q.12. How does a taxpayer claim the Lifetime Learning
Credit?
A.12. The first year that the credit will be available is 1998. Taxpayers will not be able
to claim the credit until they file their 1998 returns in 1999. Instructions accompanying
the 1998 tax forms (for returns required to be filed in 1999) will explain how to
calculate the credit and how to claim it on the tax return.
Q.13. Is there a limit on the number of years in which a
Lifetime Learning Credit may be claimed, as there is for the Hope Scholarship Credit?
A.13. Unlike the Hope Scholarship Credit, there is no limit to the number of years in
which a Lifetime Learning Credit may be claimed for each student. Thus, for example, an
individual who enrolls in one college-level class every year would be able to claim the
Lifetime Learning Credit for an unlimited number of years, provided the individual meets
the income limits and is taking the classes at institutions that meet the eligibility
requirements.
Q.14. May a parent or student claim a Lifetime Learning
Credit for tuition paid in advance of when the academic period begins?
A.14. Generally, the credit is available only for payments of qualified tuition and
related expenses that cover an academic period beginning in the same calendar year as the
year in which payment is made. (An academic period begins on the first day of classes, and
does not include periods of orientation, counseling, or vacation.) An exception, however,
allows a parent or student to claim a Lifetime Learning Credit for payments of qualified
tuition and related expenses made during the calendar year to cover an academic period
that begins in January, February, or March of the following taxable year. Because the Lifetime Learning Credit does not apply to expenses paid
before July 1, 1998, this exception does not apply to tuition paid before that date to
cover academic periods beginning before or after that date.
Q.15. May a student or a student’s parents take the
Lifetime Learning Credit for the student’s expenses in a taxable year in which the
student takes money out of an Education IRA on a tax-free basis?
A.15. No. If a student is receiving a tax-free distribution from an Education IRA in a
particular taxable year, none of that student’s expenses may be claimed as the basis
for a Lifetime Learning Credit for that year. However, the student may waive the tax-free
treatment of the Education IRA distribution and elect to pay any tax that would otherwise
be owed on the Education IRA distributions so that the student or the student's parents
may claim a Lifetime Learning Credit for expenses paid in the same year the Education IRA
distributions are received.
© Copyright 1997 Raymond S. Kulzick. All rights reserved. 971107.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.