The only educational tax credit available to graduate students who have already completed four years of post-secondary school is the lifetime learning credit. Unlike a tax deduction, the credit will reduce the amount of tax you owe on a dollar-for-dollar basis rather than just reducing the amount of your income subject to federal tax.
You can qualify for the credit during any year of your graduate studies as long as you take at least one course per year. It is not even necessary that you be pursuing a graduate degree; you may register for certain graduate courses just to sharpen your work skills. However, you will not qualify for the credit if you are married and file a separate return from your spouse; your adjusted gross income exceeds certain levels, which for most taxpayer is $60,000 or more; or if another taxpayer claims you as a dependent on their tax return. Although you may not take the credit on your own tax return if you are a dependent, the taxpayer who claims your exemption can take the credit for you.
Not every expense that relates to your enrollment in school will increase your potential credit. The lifetime learning credit only includes the tuition and fees you pay directly to the school. However, if you must purchase books or other equipment directly from the school as a condition of enrolling, then you can include those costs as well. But if you purchase your textbooks at the local bookstore, you cannot include those costs. For example, if you register for a graduate science course that requires you to purchase a microscope and a lab coat to participate in the course, the cost of these items are still excluded from qualified expenses if their purchase is required, but the school does not sell them.
If you receive any tax-free educational assistance, such as scholarships, grants, or employer-provided assistance, then you must reduce your qualified expenses by such amounts. A reduction is also necessary if the school provides you with any type of refund for any reason. Keep in mind though that when you pay your expenses with a student loan or with a gift you receive from another taxpayer, you do not have to reduce the credit. The IRS treats this as if you paid the expenses yourself.
Claiming the Credit
The maximum lifetime learning credit you can claim in a year is $2,000. Regardless of whether you take the credit on your own return or it’s claimed by another taxpayer, an IRS Form 8863 must accompany the relevant tax return. Form 8863 walks you through the credit calculation, which is equal to 20 percent of the first $10,000 you spend in qualified expenses to attend graduate school.