Federal Tax Credits for College
The Lifetime Learning Tax Credit is a maximum $2,000 tax credit reducing your federal taxes. The tax credit is non refundable so if you don’t have federal tax you won’t get a tax credit. A parent can claim the Lifetime Learning tax credit by claiming their college student as a dependent on the parents return. Before claiming the Lifetime Learning tax credit make sure none of these 17 questions keep you from claiming the Lifetime Learning tax credit.
1. Did you receive a 1098-T from the college where your student attends?
A student must attend a qualified education institution which issues the student a form 1098-T. This is important document for receiving and keeping the Lifetime Learning tax credit. Here is a list of colleges if you don’t receive a 1098-T and aren’t sure if your college qualify.
2. Did you claim your college student child on your tax return?
Make sure your child does not file a tax return claiming themselves. If your child files a tax return they can list they are being claimed by someone else by checking a box on their federal tax return. The student can claim themselves and use the Lifetime Learning tax credit against up to $2,000 of federal taxes the student owes but typically students don’t have federal tax liabilities.
3. Did you pay for your child’s tuition?
No problem - a loan can pay the tuition, a grandparent can pay the tuition. Anyone can pay the tuition. The payment by others is considered an exempt education gift and a payment by the parent claiming the dependent college student.
4. Did a grant cover the tuition and qualified education costs?
Review your form 1098-T as Box 1 (payments) of 1098-T must be reduced by box 5 (scholarships and grants) of 1098-T. You should get a calendar year payment transcript from the college as proof of payments as 1098-T can incorrectly only list charges instead of payments. You need proof of payments and if ever questioned by the IRS. The Lifetime Learning tax credit maximum is $10,000 in net tuition 1098-T line 1-5 to maximize the credit for the tax year. Grants and scholarships reduce qualified expenses first unless you elect to allocate them to room and board. If so you would increase your net qualified education expenses and claim more credit but you would also need to report these grants as taxable income on your return. Maximizing your $10,000 amount to maximize your $2,000 tax credit and refund amount is a legitimate way to legally avoid and minimize your taxes and increase your refund.
5. Did your student payment transcript show a refund from a classed dropped last tax year?
A refund from dropped classes in a current year would lower current year qualified education expenses. A tuition refund for a prior year may require you to calculate and repay part of last years Lifetime Learning tax credit this year. Another good reason to have an annual school payment transcript.
6. Was your college student full time?
1098-T has a box checked full time that allows the American Opportunity tax credit (AOTC) to be taken. A part time student or a high school student can not take the AOTC tax credit. A part time student or a high school student taking early college classes can take the Lifetime Learning tax credit on the tax return where the student is claimed.
7. Are scholarships taxable income?
If scholarships aren’t used for eligible education expenses then the scholarships are considered taxable income. Scholarships received reduced your net 1098-T box 1 eligible education expenses for calculating Lifetime Learning credit amounts. You can elect to report scholarships against room and board instead of tuition and report extra taxable income but also receive extra Lifetime Learning credit as tuition would not need reduced for the tax credit since the scholarships were reported as taxable income.
8. Was your tuition cost reimbursed by an employer?
The Lifetime Learning credit is available for your net cost. If your employer reimbursement is a tax free benefit you need to reduce your 1098-T box 1 qualified expenses by the amount of tax free reimbursement you received from your employer.
9. Is your income below the Lifetime Learning tax credit limits for 2018?
$114,000 to $134,000 is the Lifetime Learning credit phase out for joint filers. $57,000 to $67,000 for other filers including single, head of household and qualified widower. Married filed separately do not qualify for the Lifetime Learning credit . Separated parents may qualified for head of household status under the IRS rules and claiming Lifetime Learning credit would be a benefit of qualifying for this status.
10. Has your Lifetime Learning credit been removed in the past from your tax return?
You need to file IRS form 8862 to verify you are eligible to file for Lifetime Learning tax benefits this tax year.
11. Should your dependent student claim the Lifetime Learning Credit instead of you?
Under 2018 tax law you may be giving up a qualified relative tax credit of $500 depending on your adjusted gross income plus a student can only receive a tax credit against federal income tax incurred. Most students don’t have a lot of federal taxes incurred on their tax return. Electing to forgo a dependent deduction and allow your college student to claim the Lifetime Learning Credit may still be beneficial in certain circumstances.
12. Are you sure no one else claimed your dependent student?
If you efile the IRS should reject your return if someone else claimed your dependent child. In separation or divorce situations you would need to agree with your spouse or win the tiebreaker rules provided by the IRS. If you are not the child’s parent you would need to make sure the parents aren’t claiming the child. If the student is 24 years old with taxable income of less than $4,050 or permanently disabled you can’t claim your child as a dependent and thus can’t claim the Lifetime Learning tax credit.
13. I’m a foreign student with foreign parents not filing US taxes?
A nonresident alien student is not eligible for the Lifetime Learning credit. A nonresident alien student is required by the IRS to file form 8843 annually with the IRS.
14. Wow you completed all these questions so what other education tax planning do I need to consider?
Because tuition is on a fiscal year payment of tuition in December or January can really effect your AOTC or lifetime learning tax credit so plan carefully which tax year to make your tuition payment and when grants and scholarships are credited especially in the first freshman year (Fall) and last senior year (Spring) semester of a student's college career. Net spending on tuition in excess of $4,000 per student for AOTC per tax year and $10,000 for lifetime learning per year provide no tax credit benefit. Likewise time your 529 withdrawals and savings bond withdrawals so they are in the correct tax year so your not paying tax on the deferred earnings on these accounts as they are cashed in. Be sure to include your Lifetime Learning credit benefit from the prior year on the Fasfa worksheet so your Fasfa benefits are accurate.
15. Should I use a tax professional to help me claim the Lifetime Learning tax credit benefit?
As you can see the Lifetime Learning tax credit is complicated and the most important job is for you to coordinate who is going to claim the tax credit (one credit per student only on return where student is claimed properly) and that all your proof from current and past years are complete. A tax professional can verify you claimed the Lifetime Learning credit correctly or answer any questions not clearly explained in this article but will need you or your student to coordinate the proof, paperwork and family communication for claiming the Lifetime Learning tax credit correctly. A tax professional can do your tax return with proper documentation. You can ask a tax professional to verify your TurboTax or self prepared Lifetime Learning tax credit claim is correct. A tax professional can amend returns that are wrong for prior years or student returns that claim student incorrectly in current year.
16. Was Lifetime Learning tax credit extended for 2018?
Yes AOTC and Lifetime Learning tax credits were extended to 2018 and are currently permanently in the tax law.
17. What about the American Opportunity Tax Credit (AOTC)?
I covered this complimentary tax credit in a separate article. One credit per year per student so if you got disqualified for AOTC tax credit make sure to utilize the Lifetime learning tax credit instead. Check if the AOTC $2,500 tax credit with $1,000 refundable is bigger refund than the $2,000 Lifetime Learning credit. One education tax credit per student per year but if you have two or more students on a tax each student can claim a different tax credit.
Do you have any IRS statistics on the education tax credit?
The IRS received 25,989,664 1098Ts in 2017. Only 11,090,423 IRS form 8863’s were filed in 2016 so apparently many people did not bother to claim their education tax credit. The IRS via 1098-T matching has identified a significant amount of returns that claimed AOTC but did not have 1098-T’s filed or students were not full time or were graduate students. With a 2017 total of 2,354,418 returns without a 1098-T match the IRS will continue to monitor claims closely and issue notices for returns without an accurately matched 1098-T or other matching errors mentioned above like graduate student box checked on the 1098 or full time student box not checked. Either of these matching errors can generate an IRS tax notice questioning the correctness of your AOTC tax credit.
I didn’t want to read all this technical stuff - how about giving me a checklist?
Checklist for Lifetime Learning credit
All 1098Ts for student for the current tax year
Tax year payment, charges and credits for student from college
Who is claiming student on their taxes?
Students tax return if one has already been filed?
Questions? Comments? Post below or contact me.