Lifetime Credit

Posted on September 13, 2008 
Filed Under Credits, Federal Income Tax

The lifetime learning credit, like the Hope credit, can be claimed for qualified tuition expenses incurred during the course of postsecondary study at an accredited technical-vocational institute, college, or university. The lifetime credit is available to a taxpayer, taxpayer’s spouse, or individuals the taxpayer can claim as dependents. For each household, a $2,000 maximum lifetime learning credit can be claimed each year; this limit is calculated as 20% of a family’s total qualified tuition expenses up to $10,000. A student cannot claim the Hope and lifetime credits in the same year; in other words, the lifetime credit is available to a student any year the Hope credit isn’t used.

Unlike the Hope credit, the lifetime learning credit is good for any stage of postsecondary education, including study at graduate school. Perhaps of greater importance, there is no limit on the number of years the lifetime credit can be claimed: it can be taken once, twice, or more. In addition, the lifetime credit doesn’t impose a workload requirement and allows a student to take non-degree classes or enroll in courses to acquire or improve job skills. In contrast, the Hope credit is predicated on the first two years of full- or half-time study for a degree, certificate, or other acceptable educational credential and expires–becomes void–after two uses by the same student.

Another prominent difference between the credits is the unit of measure. Specifically, the unit of measure to determine the dollar limit for the lifetime credit is not the individual but rather the household; the $2,000 limit applies regardless of the number of eligible students living under the same roof. Conversely, the unit of measure for the Hope credit is the individual student; put differently, there is no dollar limit at the household level for the Hope credit.

The Hope and lifetime learning credits have the same income limitation, and these credits are not available in 2007 to single individuals with modified adjusted gross income (AGI) over $57,000 or joint filers with modified AGI over $114,000 (the 2008 limits are $58,000 for single and $116,000 for joint filers). (Note: For the most part, modified AGI is AGI plus any exclusion or deduction for foreign earned income and foreign housing costs.) In addition, the credits are subject to phase out at lower levels of modified AGI: for single taxpayers, the phaseout range is $47,000 to $57,000 modified AGI (in 2008, the range is $48,000 to $58,000); for joint filers, the phaseout range is $94,000 to $114,000 modified AGI (the range in 2008 is $96,000 to $116,000).

Finally, the (pdf file) is not bound by the felony drug rule, that is, a student qualifies for the credit even if convicted at the state or federal level for felony drug possession or distribution. Other rules and regulations for the Hope and lifetime learning credits are the same; click on , an earlier post to this web log, and for a full discussion.

The example below provides a summary of the tax advantages provided by the Hope and lifetime credits and also points out important differences between the two.

Example: A married couple filing jointly with a modified AGI of $102,000 in 2008 claims their daughter as a dependent and pays $8,000 in qualified graduate school tuition on her behalf. The couple’s excess modified AGI is $6,000 ($102,000 modified AGI - $96,000 phaseout threshold) or 30% of the $20,000 phaseout range ($6,000/[$116,000 upper phaseout limit - $96,000 lower phaseout limit] or $6,000/$20,000), which reduces the tentative lifetime learning credit of $1,600 (20% of $8,000 qualified expenses) by 30% to a final allowable amount of $1,120. Because the daughter is enrolled in graduate school, she is not eligible for the Hope credit. But if we change the example slightly so that the couple’s daughter is enrolled as either a freshman or sophomore and not as a graduate student, then the Hope credit becomes an option, indeed, the better choice. First, the Hope credit is good only for the first two years of postsecondary (undergraduate) study or equivalent. Second, it will increase the couple’s tax credit by $140 (the tentative $1,800 Hope credit reduced by 30% to a final allowable amount of $1,260 minus $1,120 available under the lifetime credit).

Supplementary relevant articles on the lifetime learning credit are listed below:

Many happy returns, Roger

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