33.9 Lifetime Learning Credit

For academic expenses paid during 2012, you may claim on Form 8863 a Lifetime Learning credit of up to $2,000 for the total qualified expenses paid for yourself, your spouse, or your dependents enrolled in eligible educational institutions (33.7) during the year, subject to the income phaseout (33.10). The credit is nonrefundable, meaning that it cannot exceed your regular tax plus AMT liability. In addition to tuition, the only qualified expenses are student activity fees and course-related books, supplies, and equipment that must be paid to the educational institution as a condition of enrollment or attendance.

In contrast to the American Opportunity credit, the Lifetime Learning credit does not have a degree requirement or a workload requirement. The credit may be claimed for one or more courses at an eligible educational institution that are either part of a post-secondary degree program or part of a nondegree program taken to acquire or improve job skills. The Lifetime Learning credit is not limited to students in the first four years of postsecondary education, as is the American Opportunity credit. There is no limit on the number of years for which the Lifetime Learning credit can be claimed.

The Lifetime Learning credit for 2012 is 20% of the first $10,000 paid in 2012 for qualified expenses for all eligible students in the family. Thus, the maximum Lifetime Learning credit you may claim for 2012 is $2,000 (20% of $10,000), but the maximum may be reduced because of the income-based phaseout or because the allowable credit (after the phaseout) exceeds your tax liability. Under current law, both the credit percentage (20%) and the expense limit ($10,000) are fixed and not eligible for an inflation adjustment.

For students within the first four years of post-secondary education in 2012, both the Lifetime Learning credit and the American Opportunity credit are potentially available, but you cannot elect both credits for the same student and the American Opportunity credit is more advantageous. For one student, the maximum Lifetime Learning credit is $2,000 and the maximum American Opportunity credit is $2,500, and if you paid qualified expenses for more than one eligible student, the overall Lifetime Learning credit you may claim remains $2,000 regardless of the number of students, whereas the American Opportunity credit is up to $2,500 per eligible student (33.8). In addition, a more favorable phaseout range applies to the American Opportunity credit and 40% of the American Opportunity credit is refundable (33.8), whereas the Lifetime Learning credit is nonrefundable.

Phaseout of credit.

The tentative Lifetime Learning credit (20% of the first $10,000 of qualified expenses) for 2012 is phased out if modified adjusted gross income (MAGI; same definition as at 33.8) is between $52,000 and $62,000 and you file as single, head of household, or qualifying widow(er), or between $104,000 and $124,000 on a joint return. No credit is allowed for 2012 once MAGI reaches $62,000, or $124,000 on a joint return.

Tax liability limitation.

The Lifetime Learning credit allowed after applying the phaseout rule is a nonrefundable credit that is allowed only to the extent of your tax liability. When this book went to press, legislation was needed to extend to 2012 favorable liability limitation rules (23.3). The Form 8863 instructions have a credit limit worksheet for applying the tax liability limitation.