Lifetime Learning Credit

[cch0525]

My wife and I are MFJ. My wife is in grad school full time and therefore has education expenses via 1098-T in her name. Her parents have a 529 plan in their name, which they use to pay all of the education expenses for my wife (they receive a 1099-Q in their name). Are we able to claim the Lifetime Learning Credit for my wifes expenses if they are paid for by her parents' 529 plan? I would think they'd get that 1099-Q distribution tax free since it goes toward qualified education expenses. Does that preclude my wife from the LLC? I can provide specific details from the 1098-T and 1099-Q if it is helpful. Thanks in advance. 

[DavidD66]

No, you cannot claim the Lifetime Learning Credit (or American Opportunity Credit) if the education expenses were paid from a 529 Plan distribution, unless the 529 Plan distribution is treated as a non-qualified distribution and tax and penalties are paid.

[cch0525]

Got it, thanks. Theoretically, if her parents took the penalty for 529 withdrawal and the LLC provided a larger credit then their penalty, we could take it at that point correct?

[Vanessa A]

Yes.  If you chose to treat the 529 withdrawal as a non-qualified distribution, and took the penalty, you could then claim the Lifetime Learning Credit.  The non-qualified distributions would get a 10% penalty on the earnings.  The Lifetime Learning Credit is a maximum credit of $2,000 and it is not refundable.  It will only lower your tax liability.  Below are some details on the education credits to help you determine if you may qualify for the LLC. 

 Lifetime Learning Credit

• You can take this for an unlimited number of years
• Twenty percent of expenses up to $2,000
• Non-Refundable meaning this can reduce the amount of taxes you owe, but if your tax liability is less than the LLC, your tax will be reduced to $0 and the rest of the credit is lost. 
• Cannot be claimed as a dependent on any one else's return (if you are claimed as a dependent the person claiming you may be able to claim the credit)
• Be enrolled for at least one academic period beginning in the tax year. Academic Period can be semesters, trimesters, quarters, or any other period of study such as a summer school session. The school determines academic periods. For schools that use clock or credit hours and do not have academic terms, the payment period may be treated as an academic period.
• Be enrolled or taking courses at an eligible educational institution.
• Be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills.
• To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
• You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
• You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).
• You cannot be Married Filing Separately

American Opportunity Tax Credit.

• Available for the first 4 years of college
• Max amount is $2,500 per student
• Partially refundable credit meaning if your tax liability is $0, 40% (up to $1,000) is refundable
• Be enrolled in a degree or credential seeking program
• Not have a felony drug conviction
• Be enrolled at least half time
• Cannot be claimed as a dependent on anyone else's return. (if you are claimed as a dependent the person claiming you may be able to claim the credit)
• To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
• You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
• You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).