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Lifetime Learning Education Credit 101

Lifetime Learning Education Credit 101
Ines Zemelman, EA
23 March 2022

When we hear the word “education”, we often think of children. But, education is broader than that, and learning should never end, no matter your age.  Regardless of whether or not you enjoy learning, education is not cheap these days, and if your education can be paid for by someone else - you’re in luck. Thankfully, even Uncle Sam will help foot some of the bill.

Who is eligible for a tuition tax credit

You can claim an education credit for yourself, your spouse, or a dependent you claim on your tax return who was enrolled at or attending an eligible education institution.  If a student is claimed as a dependent on another person's tax return, all qualified education expenses of the student are treated as having been paid by that person and only that person can claim an education credit for the student. If a student isn't claimed as a dependent on another person's tax return, then only the student can claim the credit.  There are two types of education credits American opportunity credit and lifetime learning education credit and form 8863 is used to calculate the amount of credit.

Who cannot claim Continuing education tax credits

You are not eligible to claim education credit if any of the following conditions apply:

  • If you are claimed as a dependent on another person’s tax return
  • Your filing status is married filing separately
  • You are a nonresident alien for the tax year

American Opportunity Credit

You may be able to claim a maximum annual credit of upto $2,500 which is equal to 100% of the first $2,000 and 25% of the next $2,000 of adjusted qualified education expenses paid.  The amount of credit is limited if the modified adjusted gross income exceeds a specified amount.  40% of this credit may be refundable if you owe no tax and the rest is nonrefundable.

Eligibility:

  • Student have not completed the first four years of postsecondary education at the beginning of the tax year
  • Credit is available only for 4 tax years and if the credit is already claimed for the student for any 4 tax years, then not eligible to claim for the next tax year
  • Must be enrolled at least half time that leads to a degree, certificate, or other recognized educational credential
  • Student had not been convicted of a federal or state felony
  • Filers and students must have been issued a TIN by the due date of tax return including extensions
  • Educational institution’s EIN must be reported on Form 8863

Qualified Education Expenses - are school expenses tax deductible

  • Tuition, fees and other related expense required for enrollment at an eligible educational institution
  • Course materials which include books, supplies, and equipment even if it is not paid to the school
  • Nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. 

Personal expenses which do not qualify include room and board, insurance,   medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. 

If you or the student takes a deduction for higher education expenses, such as on Schedule C (Form 1040), you cannot use those same expenses in your qualified education expenses when figuring your education credits.

Can parents claim the American opportunity credit

If you are being claimed as a dependent on your parent’s tax return, then the parents are eligible to claim the education credit without considering who actually paid the expenses.

Lifetime Learning credit

You may be able to claim a lifetime education tax credit equals 20% of adjusted qualified education expenses upto a maximum of $10,000 of qualified expenses per return or upto $2,000.  However, you cannot claim both american opportunity credit and life time learning credit for any student for the same tax year. Same as american opportunity tax credit, the amount of credit is limited if the modified adjusted gross income exceeds a specified amount.  Also, lifelong learning credit is not refundable.  Credit is available for all years of postsecondary education and for courses to acquire or improve job skills.  Credit can be claimed for an unlimited number of tax years.

Who qualifies for the lifetime learning credit 

  • You pay qualified education expenses of higher education for an eligible student
  • The eligible student is either yourself, your spouse, or a dependent you claim on your tax return

Qualified Education Expenses 

  • Tuition, fees and other related expense required for enrollment at an eligible educational institution
  • Amount paid for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance.
  • Nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance.

Personal expenses which do not qualify include room and board, insurance,   medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses.

Tuition and Fees Deduction 

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 repealed the tuition and fees deduction for tax years beginning 2021.  Taxpayer can claim the deduction on Form 8917 for tax years 2020 and prior.  Taxpayers are allowed to reduce their taxable income by upto $4,000.

Who can take the deduction?

You, your spouse or a dependent you claim on the tax return was a student enrolled at or attending an eligible educational institution.  Qualified expenses include tuition and fees required for enrollment at an eligible educational institution.  Amount paid for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance.  Nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance.  Personal expenses which do not qualify include room and board, insurance,   medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses.

You can’t claim the credit if your filing status is married filing separately, another person can claim an exemption for you as a dependent on his or her tax return, and if your modified adjusted gross income exceeds a specified limit.

1098-T Requirement — is it possible to claim an education deduction or credit without Form 1098-T?

In order to claim American opportunity credit or lifetime learning credit, the law requires a taxpayer to receive Form 1098-T from an eligible educational institution.  However, you may claim one of the education credits even though 1098-T was not issued, if you can demonstrate that you were enrolled at an eligible education institution and can substantiate the payment of qualified tuition and related expenses.

Can you deduct school books on taxes

As indicated above, expenses incurred for books can be deducted under both American opportunity credit and lifetime learning credit.  For American opportunity credit it is not necessary that the books are purchased as a condition of enrolment or attendance.  However, for lifetime learning credit, amount paid for books should be paid to the institution as a condition of enrolment or attendance.

College student tax credit 2020

American opportunity credit and lifetime learning credit are the main student tax credits available for college students in order to reduce the total tax liability. An eligible educational institution for education credit generally include any accredited public, nonprofit, or proprietary (private) college, university, vocational school, or other postsecondary institution. Also, the institution must be eligible to participate in a student aid program administered by the Department of Education.

Deducting Work-related education as a business expense 

Luckily, there is another option. It is possible to deduct expenses for your education as a career expense. Sole proprietors can consider the expense to be a business cost and it can be written off using Schedule C. 

Under the recent tax bill changes, business deduction for work-related education eliminated for employees. The new tax law eliminates the ability for employees to deduct work-related expenses as an itemized deduction on Schedule A.

Employer-Provided Educational Assistance 

No changes made to employer-provided education assistance benefits. The employer-provided education assistance exclusion allows employers to offer up to $5,250 per year in educational assistance as a tax-free benefit.

Who foots the bill matters?

You must have paid for it. If the course was paid for by your employer, you can’t deduct it. Tax laws allow employers to pay a maximum of $5,250 per year, per employee for employee education without considering its taxable income for the employee (assuming this benefit is available to all employees). It is not surprising, then, that the employee cannot also deduct this expense.  Also, the employee must generally pay tax on the amount which is more than $5,250.

Deductibility can be determined using two tests

Educational expenses can be deducted if they meet either of the two tests below.

Maintains/improves skills required for business - The first test is that the expense improves or maintains skills required for your current business/ trade.

Examples are a salesperson taking a negotiation seminar, a bookkeeper taking a finance class, or an HR consultant attending a course on employee benefits or employment law.

Continuing education - The second test is that the expense is necessary to meet a requirement of a regulation or law, an employer requirement, or is required to maintain employment, pay rate, or job status. 

  • Examples are classes necessary to maintain license to practice law, medical practice, or driver training for truck drivers.

Current or New Career? Current careers only

If the educational expense trains you to perform a new job, it is not deductible. As an example, a dancer who is taking classes to obtain her real estate license cannot deduct that expense. But, both a hairdresser and a doctor could take meditation in business seminar and deduct it.

In general, expenses to obtain a college degree are usually not deductible since most degrees qualify a person for new careers.

Specific circumstances matter

Although qualification for new professions is an objective determination, there are still some subjective components. A classic example is an MBA. Although an MBA does not qualify a person for a different career as a law degree does, the deductibility of an MBA depends on the specific situation.

Hard, but not impossible. A recent example of successfully making your case to the IRS is the situation of a nurse who worked in various nursing and administrative roles for over two decades. She made the decision to get an MBA to improve her skills in her administrative role. Although she was currently working as a manager, the IRS did not allow her deduction. She appealed, and a tax court ruled in her favor. Although she did get a different job after obtaining the MBA, she successfully argued that she pursued the MBA only to improve her current skills, and would have qualified for the new position even without having the MBA.

In general, it is hard to deduct MBA expenses

Although the example above worked in the taxpayer’s favor, don’t plan on being able to deduct an MBA. There are many other cases with different results, usually resting on the “new career” argument.

Ines Zemelman, EA
Founder of TFX