A client turns 73 in November, inherits her brother's IRA in March, and wants to fund a grandchild's tuition. Three planning regimes collide in one return.
Education planning means helping a family pay for school at the lowest tax cost. It turns on two tools: the education credits and IRC §529 plans. A credit reduces tax directly, while a §529 plan shelters investment growth on money saved for school.
The lifetime learning credit (LLC) also covers students the American opportunity credit leaves out, such as someone taking a single course. It equals 20 percent of the first $10,000 of qualified tuition and related expenses per return, so it tops out at $2,000. It is nonrefundable (it can cut tax to zero but can't create a refund) and has no course-load or degree requirement.
Compare the lifetime learning credit to the American opportunity tax credit (AOTC):
In the phase-out range, both the lifetime learning credit and the AOTC shrink as MAGI rises, reaching zero at the top.
Common mistakes
- Claiming the lifetime learning credit per student. The limit is $2,000 per return. Three students still yield $2,000.
- Using the same tuition twice. Tuition paid with a tax-free §529 distribution cannot also generate a credit. Split the tuition between the two first.
- Giving appreciated property instead of bequeathing it. Stock with a $120,000 basis and a $400,000 value carries $280,000 of gain to the person who receives it as a gift. If the same stock passes at death, the basis becomes $400,000.
Bottom line
- Lifetime learning credit: 20% of the first $10,000, $2,000 maximum per return, nonrefundable, phased out from $80,000 to $90,000 single and $160,000 to $180,000 MFJ.
- §529 plans allow $10,000 per year of K-12 costs, qualified postsecondary credentialing expenses, and $10,000 lifetime of student loan repayment; five-year front-loading is $95,000 per donor.
- Gifts carry over basis; inherited property takes a date-of-death fair market value basis and an automatic long-term holding period.
- Annual gift exclusion is $19,000 ($190,000 non-citizen spouse), lifetime exemption $13.99 million; direct tuition and medical payments are unlimited.
Exam shortcut
Read the stem for the vehicle first, then the age, then the year. Three age numbers decide most retirement items: 59½ ends the penalty, 70½ opens the QCD, 73 starts the RMD. If a stem mentions age 70½ and charity, the answer is exclusion, never a Schedule A deduction. For education items, ask "was this tuition already paid with tax-free money?" before computing any credit.
The full lesson (about 4,085 words, 27 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
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