Tax credits can help adults pay for a class or a degree

tax credits for school

If you're looking into how to change careers, taking a few classes to enhance your advancement prospects or thinking about graduate school for an advanced degree, one option to help make it work financially is the Lifetime Learning Credit, a tax credit intended to make higher education more affordable for American families.

Tax credits, such as the Lifetime Learning Credit, reduce 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 worked really well for me because as a student, I'm working freelance, not full-time," said Carly Bogen, a video editor who in 2010 opted to become a full-time student pursuing a master's degree in Information and Library Science at the Pratt Institute in New York City. "That gives me a lot of taxes to have to pay come April. The tax credit canceled that out for me this year, and I owed nothing, which was great."

Bogen, who works as a project assistant at the Museum of the Moving Image, said the tax credit is an essential part of her financial aid package.

"It was very important to me because it was about $2,000 in taxes that I didn't have to pay in April, which I can then put towards my tuition and living expenses instead," she said.

Tax credit

Bogen found out about the tax credit while using tax preparation software to file her 2010 taxes.

"I used the H&R Block free online tax system, and that explained it all for me and made it easy," she said. "I didn't know about it until I was doing my taxes and it was one of the options in the software."

The Lifetime Learning Credit and Hope Scholarship Credit tax benefits were created together as part of the Taxpayer Relief Act of 1997. The Hope Scholarship Credit was subsequently renamed the American Opportunity Tax Credit in the American Recovery and Reinvestment Act of 2009.

While the American Opportunity Tax Credit, which provides up to a $2,500 tax credit on qualified tuition, is limited to full-time students seeking an undergraduate degree for a total of four years, the Lifetime Learning Credit is much more flexible. The Lifetime Learning Credit provides up to a $2,000 tax credit on qualified tax returns and can be taken even if the student is only enrolled in one class and is not seeking a degree. In addition, students who qualify for the credit may take it for an unlimited number of years, making it an excellent tool for learners pursuing adult education on a part-time basis.

Unlike the American Opportunity Tax Credit, 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.

How to claim the credits

To claim the Lifetime Learning Credit tax benefit, taxpayers must meet the following requirements:

  • You must pay qualified education expenses of higher education.
  • You must pay the education expenses for an eligible student.
  • The eligible student must be either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

In addition, your modified adjusted gross income cannot exceed $120,000 if married and filing jointly, or $60,000 if your filing status is single, head of household, or qualifying widow or widower.

The Lifetime Learning 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 $10,000 in expenses. It is limited to a maximum tax credit of $2,000 per tax return. The maximum tax credit does not change even if the taxpayer is claiming a tax credit for the expenses of more than one student in the family.

For the purposes of the Lifetime Learning Credit, qualified education expenses include tuition and related expenses required for enrollment in a course. 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 as a condition of enrollment or attendance.

The tax credit is available for all years of postsecondary education (anything beyond high school) and for courses to acquire or improve job skills. The student does not need to be pursuing a degree or other recognized education credential.

You cannot claim the tax credit if your filing status is married filing separately, you are listed as a dependent in the exemptions section of another person's tax return or you claimed the American Opportunity Tax Credit or a tuition and fees deduction for the same student in that year. Additionally, you are not eligible for the tax benefit if you or your spouse were a nonresident alien for any part of the year and chose not to be treated as a resident alien for tax purposes.