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Education Tax Credit – and Life Time credit

  Sanjiv Gupta CPA  Published 
Education Tax Credit – and Life Time credit

The internal Revenue Service has designed certain tax-break plans for students who take an educational loan. The two most popular credit facilities offered by the government were American Opportunity Credit, which straight away deducted $2500 on taxable expenses and the Lifetime learning credit which still offers a $2000 deduction for graduate-level courses. However recently it was declared that American Opportunity Credit will be rendered inactive from 2012. In this article, we will try to cover all aspects of the Lifetime Learning Credit.

Lifetime learning credit does not limit the duration of the learning period for students. This is one major merit of the credit program. Students can keep engaged in academic courses for a number of years. $2000 is sanctioned as under Lifetime Learning Credit as qualified education expenses for an eligible student. Unlike a deduction program that concentrates on reducing the tax amount payable as per income, Credit plans reduce gross tax itself. This means that you can curtail your taxes to an exact zero figure. However, if the credit is more compared to your tax then the excesses will not be refunded to you. Before you apply for a credit program you can check up on the tuition and fees deduction regulations. This program is also quite popular for its tax breaks. The credits, however, have to be selected per year/per term basis and can be used for only one student at a time.

 Whoever files a student’s tax return as a single entity is eligible to apply for Lifetime Learning Credit. The student has to be a sole guarantor of such a credit program. Part-time students can also secure the Lifetime Learning Credit. This is another benefit that makes the program popular amongst various other tax-break plans. 

The expenses that are covered under Lifetime Learning Credit are tuition fees, books provisions, tools and equipment pertinent to the specific academic course of the student.  Lifetime learning credit does not facilitate lodging-related expenses or other private allowance like transport etc.  

Lifetime learning credit does not cover expenses for a course that is taken up as a hobby, cannot be used for tuition fees paid as scholarships, applicable once per year/ per household. Such credit won’t stand valid for a student who already has opted for a Hope Scholarship or tuition and fees Deduction program. If lifetime learning credit is a part of your skill enhancement program then you cannot apply for any kind of business expense deduction on the amount payable as tax.

Lifetime learning credit calculation is simple to follow; a flat 20% deduction on the qualifying expenditure of $10,000. For disaster-prone western countries, the discount amount may actually be doubled to $4000. Refer to Publication 970 to get a better picture of the Lifetime Learning Credit Program.

 American Opportunity Credit and Lifetime Learning credit do not have a similar tax structure. Lifetime learning credit is preferred to American opportunity credit because Lifetime credit plan can be carried out over a number of years. American opportunity credit on the other hand covers a maximum of 4 years of academic qualification expenses.

 Also, Lifetime Learning Credit gains an upper hand when compared with Hope credit. While Hope credit facilitates a deduction of $1800 and no special allowance for the mid-western disaster-prone area, lifetime credit offers $2000 for the normal program and $4000 for students who reside in the disaster-prone areas. Even there is a huge disparity when considering the duration of policy validation; hope credit provides a mere 2 years coverage while lifetime learning credit does not have any time limitation. To apply for Hope credit students should have certain pre-qualification credentials. This is not mandated for Lifetime Learning Credit. The advantage list for lifetime learning credit runs long.

 Lifetime learning credit can be claimed by filing federal tax form 1040 and 1040A along with form 8863 without having to itemize deduction.