The Lifetime Learning Credit vs. the American Opportunity Tax Credit
Key Points – The Lifetime Learning Credit vs. the American Opportunity Tax Credit
- What Is the LLC?
- Who Is It for?
- What Does It Do?
- How the LLC Is Calculated
- How to Take Advantage of It
- The LLC vs. the American Opportunity Tax Credit
- 4 Minutes to Read | 8 Minutes to Watch
The Lifetime Learning Credit vs. the American Opportunity Tax Credit
Given the complexity of the tax code and how often it changes, the education never stops for our Director of Tax Corey Hulstein, CPA. He continuously studies the tax code to help our clients and prospective clients make informed decisions when it comes to tax planning. Today, Corey is going to educate us about tax credits for qualified tuition and related costs for eligible students on the Modern Wealth Management Educational Series. Let’s learn about the Lifetime Learning Credit and how it compares and contrasts to the American Opportunity Tax Credit.
What Is the Lifetime Learning Credit?
The Lifetime Learning Credit is a college credit that’s eligible through your tax return for any students going through post-secondary education. That includes undergraduate, postgraduate, and doctorate students. The Lifetime Learning Credit is very similar to the American Opportunity Tax Credit but has less restrictions.
What Is the American Opportunity Tax Credit?
The American Opportunity Tax Credit is the primary credit that people think of when they have dependents in college. It’s a $2,500 tax credit for students spending $4,000 or more in qualified tuition.
The Lifetime Learning Credit is available for students who are seeking additional education past the four-year window offered by the American Opportunity Tax Credit and the calculation for it is a little bit different. The Lifetime Learning Credit is a tax credit for 20% of the first $10,000 of qualified educational expenses up to $2,000.
Lifetime Learning Credit and American Opportunity Tax Credit Caveats
To qualify for these credits, the recipient can’t be claimed on another person’s return. The credit then defaults to the parent(s) of the recipient in the courses.
There are also income restrictions on how much credit you can receive. For the Lifetime Learning Credit and American Opportunity Tax Credit, the phaseout ranges from $160,000-$180,000 for married filing jointly. The phaseout range is $80,000-$90,000 for single filers. If you fall within those phaseout ranges, you’ll be eligible for a portion of the credit. You can’t claim it if your income exceeds those phaseout limits.
Taking Advantage of the Lifetime Learning Credit
When you’re going through tax preparation, it’s important to let your CPA know if one of your dependents is an eligible student so that the Lifetime Learning Credit can be applied. Make sure to obtain a 1098-E Tax Form from your student’s college institution that lays out what the total expenses were in qualified education costs for the current year.
There some additional costs that are eligible for the credits aside from college classes. It’s important to be aware of what these are since they differ between various credits. It’s also critical to note what funds are used to obtain the college credits.
Let’s Discuss 529 Accounts
We work with several people who contribute to 529 accounts. These accounts are only distributed for qualified education expenses to help people save for college. The thing to note here is that there’s no double benefit to a 529 account. 529 funds can’t be used to qualify for tax credits like the Lifetime Learning Credit and American Opportunity Tax Credit.
When you’re looking at payments for tuition, it’s important to structure how to utilize 529 accounts to make sure you have some funds available for the college credits. So, just to be clear, 529 dollars aren’t qualified education expenses.
Maximizing the Lifetime Learning Credit in Your Plan
Let’s look at how to structure the Lifetime Learning Credit to maximize every dollar that you can. For undergraduates, the American Opportunity Tax Credit is more likely to be advantageous. It’s only available for the first four years.
There’s also a weird dynamic to a fiscal year calendar when talking about education as opposed to a calendar year when talking about tax credits. Most students begin college classes in the fall and then will graduate in the spring four or five years later. It’s crucial to note that the tax years always run on a calendar basis.
So, in theory, you can get an American Opportunity Tax Credit in the fall semester of Year 1 of school and circle back in Year 4 during the spring and create a fifth year of tax planning availability for college credits. The timing of when you pay these expenses becomes very important. Oftentimes, you can capitalize on the Lifetime Learning Credit for the spring semester of your student’s senior year.
For students that are pursuing other degrees or that have already entered the workforce and are going back to school after a career change, the Lifetime Learning Credit comes into play here as well. You don’t need to deal with the restrictions of the American Opportunity Tax Credit in those scenarios.
Summarizing the Benefits of the Lifetime Learning Credit
So, let do a quick overview of the Lifetime Learning Credit and its various benefits.
- It’s available to postsecondary education students at any phase of life.
- There are no age restrictions.
- There are no maximum uses of the Lifetime Learning Credit.
- And there are no limits on the number of courses taken or what program is being studied.
- The Lifetime Learning Credit and American Opportunity Tax Credit can both be useful tools for those pursuing college degrees.
- It’s important to structure the timing of your tax credits appropriately, as there is a five-year window for most postsecondary education students. Remember that there are only four years in which the American Opportunity Tax Credit can be used.
- Make sure you’re using the correct funds to obtain the credits when reporting expenses. While 529s are a useful tool in the right situation, you might want to consider taking money from a separate account to obtain the credits themselves.
- The Lifetime Learning Credit has very few restrictions of who can receive the credit. If you’re looking to go back to school, structure those payments accordingly to get as much value from the tax system as possible.
Have Any Questions?
Again, let your CPA know if one of your dependents is an eligible postsecondary student so that the Lifetime Learning Credit can be applied. If you have questions about the Lifetime Learning Credit and how it compares and contrasts from the American Opportunity Tax Credit, let us know. You can schedule a conversation with one of our CFP® Professionals and/or CPAs below.
You have the option of scheduling a 20-minute “ask anything” session or complimentary consultation. It can be in person, virtually, or by phone. Whether you’re going back to school or have a postsecondary education student, we hope that this information can be useful to you.
Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.