How Is the Credit Figured?

The amount of the lifetime learning credit is 20% of the first $5,000 of qualified tuition and related expenses you paid for all eligible students. The maximum amount of lifetime learning credit you can claim for 2002 is $1,000 (20% × $5,000). However, that amount may be reduced based on your modified adjusted gross income (MAGI). See Does the Amount of Your Income Affect the Amount of Your Credit, below.

Example.   Bruce and Toni Harper are married and file a joint tax return. For 2002, their MAGI is $50,000. Toni is attending the community college (an eligible educational institution) to earn credits toward an associate's degree in nursing. She already has a bachelor's degree in history and wants to become a nurse. In August 2002, Toni paid $4,000 for her Fall 2002 semester. Bruce and Toni can claim an $800 (20% × $4,000) lifetime learning credit on their 2002 joint tax return.

Does the Amount of Your Income Affect the Amount of Your Credit?

The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $41,000 and $51,000 ($82,000 and $102,000 if you file a joint return). You cannot claim a lifetime learning credit if your MAGI is $51,000 or more ($102,000 or more if you file a joint return).

Modified adjusted gross income (MAGI).   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.

MAGI when using Form 1040A.   If you file Form 1040A, your MAGI is the AGI on line 22 of that form.

MAGI when using Form 1040.   If you file Form 1040, your MAGI is the AGI on line 36 of that form, modified by adding back any:

1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Exclusion of income for bona fide residents of American Samoa, and
4. Exclusion of income from Puerto Rico.

You can use Worksheet 2-1 to figure your MAGI.

Phaseout.   The phaseout, if any, can be figured in Part III of Form 8863 or as shown in the following example.

Example.   The information is the same as in the Harper example (previous column), except that Bruce and Toni have a MAGI of $88,000.

They figure the total tentative lifetime learning credit (20% of the first $5,000 of qualified expenses they paid for all eligible students). As shown in the previous example, the result is an $800 (20% x $4,000) total tentative credit.

To figure their allowable credit, they multiply the tentative credit ($800) by a fraction. Because they are filing a joint return, the numerator of the fraction is $102,000 (the upper limit) minus their MAGI. The denominator is $20,000, which is the range of incomes for the phaseout ($82,000 to $102,000). The result is the amount of their lifetime learning credit ($560).

	$800	×	$102,000 - $88,000	=	$560
			$20,000

How Is the Credit Claimed?

You claim the lifetime learning credit by completing Parts II and III of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 48, or Form 1040A, line 31. A filled-in Form 8863 is shown in the Illustrated Example at the end of this chapter.

An eligible educational institution (such as a college or university) that received payment of qualified tuition and related expenses in 2002 generally must issue Form 1098-T, Tuition Payments Statement, to each student by January 31, 2003. The information on Form 1098-T will help you determine whether you can claim an education

Worksheet 2-1.

MAGI for the Lifetime Learning Credit

1.	Enter your adjusted gross income (Form 1040, line 36)					1.
2.	Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 43, or Form 2555-EZ, line 18)		2.
3.	Enter the amount of income from Puerto Rico that you are excluding		3.
4.	Enter the amount of income from American Samoa that you are excluding (Form 4563, line 15)		4.
5.	Add the amounts on lines 2, 3, and 4					5.
6.	Add the amounts on lines 1 and 5. This is your modified adjusted gross income. Enter this amount on line 10 of your Form 8863					6.

Request for Student's or Borrower's Social Security Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number.

When Must the Credit Be Repaid (Recaptured)?

If, after you file your 2002 tax return, you receive tax-free educational assistance for, or a refund of, an expense you used to figure a lifetime learning credit on that return, you may have to repay all or part of the credit. You must refigure your lifetime learning credit for 2002 as if the assistance or refund was received in 2002. Subtract the amount of the refigured credit from the amount of the credit you claimed. The result is the amount you must repay. You add the repayment (recapture) to your tax liability for the year you receive the assistance or refund (see the instructions for your tax return for that year). Your original 2002 tax return does not change.

Illustrated Example

Judy Green, a single taxpayer, is taking courses at a community college to be recertified to teach in public schools. Her MAGI is $22,000. Her tax, before credits, is $1,845. In July 2002 she pays $700 for the Summer 2002 semester; in August 2002 she pays $1,900 for the Fall 2002 semester; and in December 2002 she pays another $1,900 for the Spring semester beginning January 2003. Judy and the college meet all the requirements for the lifetime learning credit. She can use all of the $4,500 tuition she paid in 2002 when figuring her credit for her 2002 tax return. She figures her credit as shown on the filled-in Form 8863 on the next page.

Note.   In Appendix A at the end of this publication, there is an example illustrating the use of Form 8863 when both the Hope credit and the lifetime learning credit are claimed on the same tax return.

Form 8863 for Judy Green

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