How the Lifetime Learning Credit Works

If you're thinking about seeking the Lifetime Learning Credit, it's a good idea to first take a good, hard look at yourself. Or at least at your income and school-related expenses.

The size of the credit depends in part on the amount of your eligible expenses. The LLC covers 20 percent of up to $10,000 in tuition and other costs. For those students who aren't majoring in math, that means you can get up to $2,000 in expenses credited to you for tax purposes. So whether school costs you $15,000 or $150,000 in a given year, you're still going to get the same $2,000 credit [source: IRS].

Like many tax credits, the LLC is intended primarily for people that the government thinks could use the help. That means it comes with some income restrictions. In 2014, a person whose modified adjusted gross income (MAGI) is $52,000 or less ($104,000 for joint followers) is eligible for the full amount of the credit: 20 percent of up to $10,000 in expenses. Individuals whose MAGI is more than $52,000 and less than $62,000 ($124,000 for joint filers) can still get some of the credit, at a reduced rate. More than $62,000 means you can't claim the credit [source: IRS]. Your MAGI is your gross income with certain deductions subtracted and others added.

The tricky part for some tax filers is making sure that you get all of the credit to which you're entitled. The LLC isn't refundable. That means that, if the government already owes you a tax refund, Uncle Sam won't include the LLC amount in the check that it -- eventually -- sends you. A person or family can look to get around this by reducing withholdings from paychecks or elsewhere to make sure that they owe at least some taxes at the end of the year [sources: IRS]

Unless you're using that credit to learn accounting and tax law, it also might be a good idea to consult a professional before filing.

Some say part of the purpose of higher education is to teach college kids how to be adults and prepare them for life in the "real world." If you've been on a university campus or snuck into a fraternity's 80s-themed kegger lately, you might counter that our schools are failing in this role. Sound decision-making may not exactly be a college student's forte, but it pays for them to weigh the pros and cons of the two school-related tax credits before choosing which one to take.

The American Opportunity Tax Credit (AOTC) offers students a slightly higher credit -- $2,500 -- than the Lifetime Learning Credit (LLC) for tuition and expenses. Unlike the LLC, the AOTC is partially refundable. If the government owes you money at the end of the year, you can add up to $1,000 worth of AOTC money to the tab. The AOTC also covers a wider economic spectrum of tax filers, with income limits up to $90,000 ($180,000 for joint filers) [source: IRS].

There are a few catches, however. First, the AOTC only applies to students who are pursuing a degree or another recognized credential and were enrolled at least part-time in at least one academic period during the tax year. It can't be claimed if the student has already taken advantage of the credit in each of the previous four years. It also can't be claimed by those who have completed four years of post-secondary education or have been convicted of a felony drug offense [source: IRS].