Lifelong Learning Credit - how to reconcile with 529 payments

[batandkat]

Doing my son's taxes.

He owes $532 in Federal

He is getting his masters degree (graduate)

529 Plan paid for all tuition (we have not filed our taxes yet)

When I enter his  1098-T TurboTax calculates the Lifelong Learning Credit and gives him a REFUND of $1468.00 ( $2000 - $532)

1 - I didn't think you can get a refund with the Lifelong Learning Credit (only the American Opportunity credit allows that)

Do we need to manually adjust the worksheet for that credit so he is not getting a refund, or does he somehow qualify for this?

2 - when we do our taxes, how do we account for any of the Lifelong Learning Credit that he receives?

a) if he doesn't get the full credit,  do we need to claim $532 of the 529 plan money as taxable?

b) if he DOES get the full credit (and gets a refund) do we need to claim $2000 of the 529 plan money as taxable 

[AmyC]

Let's start at the beginning. First of all, whoever claims the student exemption, claims the student credit. If he is not your dependent, you claim nothing. If he is getting a credit, he is claiming himself, otherwise, the program would not let him have the credit.

Next, determine if you can actually claim your son as a dependent at his age with his income. Use this quick quiz, Whom May I Claim as a Dependent?

Now to answer your questions with this new perspective.

1.  The LLC gives you a tax credit

• The refund is not the LLC but caused by the LLC. The tax liability is what you look at for LLC credit. You can get a refund from the tax liability changing. You can't get a refund of the LLC - since it only works on liability IF you are claiming yourself.
• Example: 
  • tax liability of $2,500 
  • paid taxes of $800, 
  • you owe money - $1700 
  • Add education credit - LLC kicks in and covers $2k of the $2500 tax
  • tax is now $500 
  • $800 tax paid covers the other $500 of tax and you have a refund of $300.

2. When you do your taxes, only one of you will have an education credit. The one claiming the exemption. Carefully go through both returns and make sure the right person is claiming the student's exemption and credit.

b. The 529 - was it only $2,000? This could go towards room and board and not be taxable at all probably. 

• See if you can use it up with 529 qualified Room and Board. 
• If not, can it go towards education expenses and still leave the $10k for LLC?
• If not, then it is taxable.

[batandkat]

Follow up:

Our son is NOT being claimed as a dependent by us.

He is filing single.

We are filing joint/married

We have not filed our taxes yet (important to note, in case we need to claim part of the 529 payments as taxable income.  The 529 plan is owned (?) by us)

Our question is about the Lifelong Learning Credit as it pertains to using our 529 plan to cover his grad school expenses.

All of his graduate school expenses have been covered by the 529 plan (tuition, room/board, books).  This is more than the $10000 limit set by the LLC (20% of $10K = $2000).  Let's just say it was $15000

Question - if all of 2024 Grad school has been paid with the 529 plan (tuition, room, board, books) and he uses the LLC, do we need to claim $2000 of the 529 payment (which are supposed to be tax-free) as taxable income (since you cannot double-dip)?  

How do we "report" the $2000 LLC in regards to the $15000 529 plan payment?  Is $2000 taxable income and $13000 is "tax-free"?

[KrisD15]

The 2,000 Lifetime Learning Credit requires 10,000 expenses (the credit is 20% of the expenses up to 10,000 expenses) 

If he is getting 2,000 credit, there would need to be 10,000 expenses that the student is claiming. 

If part of the expenses he is claiming were expenses attributed to the 529 distribution, someone would need to claim taxable income in relation to that distribution. 

If you took the distribution, and the 1099-Q was issued in your name, you would be responsible for that additional tax liability. 

These are not easy questions to answer because a distribution can be allocated to Room and Board expense, but Room and Board expense cannot be used for an education credit. 

Without knowing all the numbers (Tuition & Fees on the 1098-T, additional books and supplies not on Form 1098-T, Scholarships, Distributions, room and board expense) we can't tell you how much, if any, needs to be claimed. 

Allocate ALL the room and board to the distribution first. 

If there is still distribution left to offset, determine how much education expense over scholarships there is. 

If there is more than 10,000 expenses in excess of scholarships, allocate the amount over 10,000 to the distribution since the credit only needs 10,000.

Does this offset scholarships and distributions and also give the full credit?

[batandkat]

One more question regarding the "refund" by using the LLC:

"The LLC is not refundable.  So, you can use the credit to pay any tax you owe but you won't receive any of the credit back as a refund".

So - why is TurboTax creating a refund when I use the LLC credit?

[Vanessa A]

It can result in a refund when it lowers your tax liability so the amount you paid in or had withheld from your wages, then becomes refundable.  Also, if you have other refundable credits, the LLC can lower your overall tax liability and then result in the other refundable credits being refunded. 

[batandkat]

Tuition alone was $12800, so over the $10000 limit for the LLC.

The 529 plan paid tuition ($12800) plus room/board ($8500 - which is allowed for 529 to cover).

I was basing our calculations solely on the 1098-T, which is tuition only (and maybe books, but that does count for education expenses),

So bottom line, we do need to account for $2000 of the 529 payments as taxable income if our son uses the LLC on his tax return?

[batandkat]

Just so I am understand the "non refundable" aspect of this...

IF a person in question had NO tax liability and did not have any income to report (ie, a full-time student who did not work, earn money), then they could not claim the $2000 LLC and receive a refund of $2000?

But if someone had a tax liability of $5000 and had $4500 taken out in federal taxes (as per their W-2), then they would owe $500.

If they then applied the LLC,  the tax liability would be reduced to $3000 ($5000 - $2000) and then their taxes paid ($4500) is subtracted from that, leaving them with a $1500 refund?

[RobertB4444]

No, you don't need the $2000 to be taxable.  The Lifetime Learning Credit only takes the deduction for the first $10,000 in tuition.  It doesn't mean that your tuition can't be more than $10,000.

You have the refund math exactly right.  And that is what happened in your son's case.

@batandkat 

[Hal_Al]

Q - I didn't think you can get a refund with the Lifelong Learning Credit (only the American Opportunity credit allows that)?

A. Correct, unless he completed his BS/BA in 2024 and started grad school, then he may be eligible for the AOC. 

Q. Do we need to manually adjust the worksheet for that credit so he is not getting a refund, or does he somehow qualify for this?

A. Sort of . You need to allocate the expenses for the best outcome for the family. 

Q - when we do our taxes, how do we account for any of the Lifelong Learning Credit that he receives?

A. Yes. But only to the extent needed. For a $532 LLC, he only needs $2660 of tuition allocated to him (2660 x 20% = 532). 

Q. if he doesn't get the full credit,  do we need to claim $532 of the 529 plan money as taxable?

A. No, you reduce the amount of tuition you claim/allocate to the 1099-Q by $2660.

Q.  if he DOES get the full credit (and gets a refund) do we need to claim $2000 of the 529 plan money as taxable 

A. That's unlikely, but again No.  You adjust the expenses that gets him that amount.  Then TT calculates the amount of the 529 earnings (box 2 of the 1099-Q) that becomes taxable income on your return. 

[KrisD15]

There is a way for the Lifetime Learning Credit to result in a refund, but only if the Taxpayer is also eligible for the Child Tax Credit. 

Look at Form 1040 line 18, this will list his income tax liability and additional tax. 

If he also is eligible for the 2,000 child tax credit, that will be listed on line 19 and is subtracted from the tax. 

So if line 18 shows 2,532, the 2,000 child tax credit would lower the tax due to 532.

If he is also eligible for a 2,000 Lifetime learning Credit, that 2,000 will be applied against the 2,532 tax first. 

Leaving 532 for the child tax credit, to zero out the tax owed and leaving 1,468 Child Tax Credit unused. 

THEN the ADDITIONAL CHILD Tax credit (which IS refundable) is applied which is the 1,468 left of the 2,000, so you end up with a 1,468 refund. 

@batandkat