Is the Lifetime Learning Credit Refundable?
Explore how the nonrefundable Lifetime Learning Credit reduces your tax liability and how it differs from other, partially refundable education credits.
The Lifetime Learning Credit (LLC) is a nonrefundable tax credit. This means it can reduce a taxpayer’s income tax liability to zero, but no portion of the credit will be issued as a refund if the credit amount exceeds the total tax owed. The credit is designed to help pay for undergraduate, graduate, and professional degree courses, including classes taken to acquire or improve job skills. Unlike some other education incentives, there is no limit on the number of years the LLC can be claimed.
Understanding Nonrefundable Tax Credits
A nonrefundable tax credit provides a dollar-for-dollar reduction of the income tax you owe. These credits are applied directly against your tax liability, which is the amount of tax calculated on your taxable income. If your tax liability is less than the nonrefundable credit, the credit will only reduce your liability to zero, and you do not receive the unused portion as a payment.
For instance, if your tax liability is $1,500 and you qualify for a $2,000 nonrefundable credit, it will eliminate your entire $1,500 tax bill. The remaining $500 of the credit is forfeited and cannot be received as a refund or carried over to a future tax year.
In contrast, a refundable credit in the same scenario would eliminate the $1,500 tax liability and result in the remaining $500 being sent to you as a tax refund. The nonrefundable nature of the LLC means its value is capped by the amount of tax you owe.
Eligibility Requirements for the Lifetime Learning Credit
To claim the Lifetime Learning Credit, the student must be enrolled at an eligible educational institution. This includes colleges, universities, vocational schools, and other postsecondary institutions eligible to participate in a student aid program from the U.S. Department of Education. The credit can be claimed for the taxpayer, their spouse, or a dependent, provided the taxpayer is not claimed as a dependent on another person’s return.
Qualified education expenses are limited to tuition and fees required for enrollment or attendance. Expenses for courses that help acquire or improve job skills also qualify for the credit. Costs for room and board, transportation, or insurance are not considered qualified expenses unless the fees are a mandatory condition of enrollment. The expenses must be for academic periods beginning in the tax year.
A significant factor in eligibility is the taxpayer’s Modified Adjusted Gross Income (MAGI). For the 2024 tax year, the credit is reduced for taxpayers with a MAGI between $80,000 and $90,000 for single filers, and between $160,000 and $180,000 for those married filing jointly. If your MAGI is $90,000 or more ($180,000 for joint filers), you cannot claim the credit.
Calculating and Claiming the Credit
The Lifetime Learning Credit is calculated as 20% of the first $10,000 in qualified education expenses, resulting in a maximum credit of $2,000 per tax return. This limit applies per return, not per student, so the total credit for a household cannot exceed the $2,000 maximum.
To claim the credit, you will need Form 1098-T, Tuition Statement, from the educational institution. Using this information, the taxpayer must complete Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). Part III of this form is used to calculate the Lifetime Learning Credit by entering the student’s information and total qualified expenses.
The final credit amount from Form 8863 is transferred to Schedule 3 (Form 1040), Additional Credits and Payments. The credit from Schedule 3 then directly reduces the total tax calculated on Form 1040.
Comparison with the American Opportunity Tax Credit
A taxpayer can only claim one education credit per student per year, making it important to compare the LLC with the American Opportunity Tax Credit (AOTC). While the LLC is entirely nonrefundable, the AOTC is partially refundable. Up to 40% of the AOTC, to a maximum of $1,000, can be refunded even if the taxpayer owes no tax.
The AOTC offers a maximum credit of $2,500 per eligible student, calculated as 100% of the first $2,000 in expenses and 25% of the next $2,000. In contrast, the LLC’s maximum is $2,000 per tax return. This makes the AOTC potentially more valuable for families with multiple students in college.
The AOTC is only available for the first four years of postsecondary education for students pursuing a degree on at least a half-time basis. The LLC is much broader and has no limit on the number of years it can be claimed. This makes the LLC the option for graduate students or individuals taking a single course for professional development.