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The Lifetime Learning provides a federal income tax credit based on the first $10,000 in postsecondary education expenses paid by the taxpayer during the tax year.

Amount of Credit

The Lifetime Learning Tax Credit provides a tax credit of up to $2,000 per taxpayer for education expenses. The amount of the credit is equal to 20% of the first $10,000 of qualified tuition and related expenses paid by the taxpayer. (In 2006 the maximum lifetime learning tax credit was increased to $4,000 and 40% for Gulf Opportunity Zone Students.)

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Note that the Lifetime Learning credit does not vary according to the number of students. This is in contrast with the Hope Scholarship, which is based on the number of eligible students in the household. This means that if you have multiple children in school at the same time and your tuition bills total more than $10,000, you only get the credit for the first $10,000 paid. You don't get another credit for each additional child. The credit is relative to the total amount of tuition paid, irrespective of the number of children in school.

(Originally the credit was equal to 20% of the first $5,000 of qualified tuition and related expenses paid by the taxpayer. Starting in 2003, the $5,000 limit was increased to $10,000. Thus the credit is up to $1,000 through the year 2002 and $2,000 thereafter.)

Section 702 of the Emergency Economic Stabilization Act of 2008 (PL 110-343) made students attending undergraduate or graduate institutions in the Midwestern disaster area eligible for the higher Gulf Opportunity Zone limits for the Hope Scholarship and Lifetime Learning Tax Credit in tax years 2008 and 2009.

Qualified Higher Education Expenses

Qualified tuition and related expenses includes expenses for any course of instruction at an eligible educational institution to acquire or improve job skills. This means that the credit may be used for part-time study, not just students enrolled at least half-time in a degree program.

Qualified higher education expenses include tuition and fees. Nonacademic fees such as student activity fees, athletic fees and insurance are excluded. The expenses must be related to the student's academic course of instruction. Expenses related to sports, games or hobbies are excluded unless they are part of the student's degree program.

The expenses must have been paid by the taxpayer or by the student, and the taxpayer must list the student as an exemption on their income tax return. (Any qualified tuition and related expenses paid by the dependent are treated as though they were paid by the taxpayer, per 26 CFR 25A(g)(3).)

Taxpayers who are married cannot claim the tax credit if they are filing separate returns.

Scholarships and financial aid do not count as qualified tuition and related expenses paid by the taxpayer. Only out-of-pocket expenses count. Gifts, bequests and inheritances do count as though paid by the taxpayer.

The credit applies to expenses paid after June 30, 1998.

Limitations and Eligibility Restrictions

Unlike the Hope Scholarship, the Lifetime Learning tax credit may be claimed for an unlimited number of years.

Coordination Restrictions

The Lifetime Learning tax credit can be used in conjunction with other tax benefits, provided that different education expenses form the basis for each benefit.

You cannot use the Lifetime Learning with the Hope Scholarship tax credit for the same student in the same year, but you can use them for different students' educational expenses in the same year.

In most cases the Hope Scholarship will yield a greater financial benefit than the Lifetime Learning tax credit. The Hope Scholarship is limited per student, while the Lifetime Learning tax credit is limited per taxpayer. The Lifetime Learning tax credit also offers a lower percentage of qualified expenses than the Hope Scholarship. The Lifetime Learning tax credit will mostly be useful for graduate and professional students who are ineligible for the Hope Scholarship of the restriction to the first few years of postsecondary education.

You cannot use the Lifetime learning tax credit and the Tuition & Fees Deduction for the same student in the same year.

Income Phaseouts

The Lifetime Learning tax credit has an income phaseout for incomes from $50,000 to $60,000 (single filers) and $100,000 to $120,000 (married filing jointly). (These are the 2010 phaseouts. The phaseouts are indexed for inflation.)

Taxpayers who are married cannot claim the tax credit if they are filing separate returns.