The Lifetime Learning Credit (LLC) is a non-refundable tax credit of up to $2,000 tax credit that helps students cover higher education expenses.
What is the Lifetime Learning Tax Credit?
The federal government offers two income tax credits to help offset the costs of higher education. They are the American Opportunity Tax Credit (AOTC) (formerly the Hope Scholarship Tax Credit) and the Lifetime Learning Tax Credit (LLC). The LLC is discussed here.
This means taxpayers who owe less tax than the maximum amount of the LLC for which they are eligible can only take a credit up to the amount of taxes they actually owe.
A taxpayer can claim the LLC for up to 20 percent of the his or her first $10,000 of out-of-pocket qualified tuition and related expenses. This credit is capped at $2,000 per taxpayer (even for joint filers with multiple students in a household). The credit can include all of the qualifying educational expenses pooled together from the taxpayer, the taxpayer’s spouse, and/or taxpayer’s dependent(s). This is different from the AOTC, which is based on the number of dependents in a family.
The LLC is calculated on eligible expenses paid during the calendar year. A student may be enrolled in an undergraduate or graduate degree program at an eligible school during the calendar year or may be enrolled in any course of instruction at an eligible school to acquire/improve the student's job skills during the calendar year. The credit is available for all years of postsecondary education.
There is no limit on the number of years the LLC can be claimed for each student in a family.
Taxpayers cannot claim the LLC if their Modified Adjusted Gross Income is $60,000 or more for a single taxpayer, or $120,000 or more for married taxpayers filing a joint return. The LLC is not available to married taxpayers who file separate returns. The actual amount of the credit depends on a family's income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition.
Who Benefits and How?
The LLC Credit was enacted to help make college more affordable by reducing the cost of higher education relative to income.
The LLC is a valuable incentive for taxpayers to pursue higher education or to acquire new or enhanced job skills. In this way, the LLC helps to expand, update, and keep competitive the knowledge and skills of our nation’s workforce.
To apply for the LLC, taxpayers must report the qualified expenses, as well as the amount of certain scholarships, grants, and untaxed income used to pay the tuition and fees. Universities are required to send information on tuition and fee payments to each taxpayer and to the IRS in the form of a 1098-T statement.
A family may claim both the LLC and the AOTC, as long as the same student isn't used as the basis for both credits and the family doesn't exceed the LLC maximum per family.
Proposals for Strengthening the LLC
AAU has long supported simplification of higher education tax incentives because of the complex rules for claiming them. They are difficult for the average taxpayer to use as effectively as Congress intended. In fact, a 2008 study by the Government Accountability Office (GAO) found that “[s]ome tax filers do not appear to make optimal education-related tax decisions” and that a likely explanation of “these taxpayers’ choices may be the complexity of postsecondary tax provisions, which experts have commonly identified as difficult for tax filers to use.”
Consolidate the AOTC and LLC into a Two-part AOTC
The AOTC and LLC should be consolidated to provide benefits for not only undergraduates but graduate students and life-long learners, many of whom are low-income and need assistance in pursuing additional skill development or the advanced degrees that employers and our economy need. An improved credit should also work well for both traditional and nontraditional students.
The first part of a consolidated tax credit should include the current AOTC, be limited to four years, and be fully or partially refundable for students enrolled at least half-time. The second part of a consolidated credit should consist of a non-refundable credit of $2,000 (like the LLC) that, like the AOTC, would cover 100 percent of the first $2,000 of the AOTC’s eligible expenses. It should also be indexed to inflation.
This proposal would simplify the LLC and also create greater parity for students beyond their first four years of college and lifetime learners. In addition, the AOTC part two would provide a benefit for graduate students who have suffered from policy changes in recent years ending their eligibility for federal subsidized student loans and requiring them to pay higher interest rates.