 Income tax 2021 2022 education credits specific instructions part number one get ready to get refunds to the max diving in the income tax 2021 2022. Most of this information can be found in the form 8863 instructions tax year 2021 on the IRS website irs.gov irs.gov income tax formula we're down on the bottom area with the credit section. Noting that both deductions and credits are good but if you had a dollar of credit and a dollar of deduction the credit would typically be better because you usually get the full dollar amount of the credit. Whereas the dollar deduction would be a decrease to the taxable income and then the tax being imposed on it at that point in time also note we have two main categories of the credits. We've got the non refundable credits and the refundable credits the non refundable credits not typically taking the tax liability below zero the refundable credits may which if they did would result in a refund but it's not really a refund at that point it's kind of like a benefit program at that time. This is the form 8863 the education credits American opportunity credit and the lifetime learning credits. Remember that we're generally thinking about these two things kind of together in that we're going to first be looking for that American opportunity credit because it's worth more typically. And if we can't get it then we'll see if we can still qualify for that lifetime learnings credit. This is the first or the top half of page two of the form 1040 where we see the non refundable component online 20 flowing in from schedule three. And then this is the bottom portion of page two of the form 1040 and the refundable area line 29 where we have the American opportunity credit form 8863 line eight. So line number one we're going by the line by line instructions we're going to be jumping back on over here to the actual form for the form 8863 line one part one. And this is after completing part three for each student into the total of all amounts from all part three in line one. So going back on over then to our instruction back on over to the instruction enter the amount from part three line 30. If you're claiming the American opportunity credit for more than one student add the amounts from each students part three line 30 and enter the total on those students on line one. So if I jump back on over we're going to say part three is going to be on page two where we have the information and we'll talk more about part three in a future presentation of course but line 20. We've got the student name the college in our place we went to cool you and then the address and we'll go into more of the detail of this information but the bottom line down here is we've got that 2,500 which is flowing into the page one here on part one page one part one. Okay back on over we're saying that if you're claiming the American opportunity credit for more than one student add the amounts from each students part three line 30. So remember we could have multiple students for the American opportunity credit whereas the lifetime learning we got the maximum amount per return and enter the total for those students in line one. So line three, enter your MAGI that's your modified adjusted gross income. Generally your MAGI is the amount on your form 1040 or 1040 SR line 11. So line three here and this is going to be important if we have any kind of like income thresholds that we need to take into consideration since it says enter the amount from form 1040 1040 SR line 11. And then you've got your exception that's where the modification takes in place. In our case if I go up to the 1040 we've got the 50,000 in line 11. That's your adjusted gross income and then it gets modified if any modification is needed for things like the form 2555 and the 4563 for example. Let's jump on back over. We're then saying however, if you're filing form 255 or form 4563 or are excluding income from Puerto Rico, you must include online three the amount of income you excluded for details. You can go to publication 970 line seven. If you are under age 24 at the end of 2021 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, you claim you're allowed credit figured in part three only as a non refundable credit to reduce your tax. So that the refundable is usually going to be beneficial because that will be you'll be able to take that into consideration. Even if your tax liability because below zero. So we got this issue between it being refundable or non refundable. You don't qualify for a refund for a refundable American opportunity credit if one a B or C two and three below apply. So number one, you were under age 18 at the end of 2021 or be age 18 at the end of 2021 and your earn income to find later was less than half of your support. So basically you kind of qualify as a dependent is is in general. This is one of the dependent requirements here and see over over age. This is or see I should say over age 18 and under age 24 at the end of 2021 and a full time student defined later and your earned income defined later was less than one half of your support defined later. So you would think in situation a B and C that generally you you may be qualified as a dependent of somebody else possibly a parent and you would think then possibly if there was any credit it might be applied on the parent return in that instance. So number two, at least one of your parents was alive at the end of 2021. So now you've got your requirements that kind of that you may qualify as a dependent. You've got a living parent and then you're you're not filing a joint return for 2021. In other words, if you're filing a joint return, then typically married filing joint would mean that you're not a dependent at that point in time. Generally, you would be filing your own return line. The continuing on line seven continued. If you meet these conditions, check the box next to line seven, skip line eight and enter amount from line seven on line nine. If these conditions don't apply to you, complete line eight. If you meet these conditions, check the box next to line seven, skip line eight and enter the amount from line seven on line nine. If these conditions don't apply to you, complete line eight. So if we jump back on over on line number seven, we've got to multiply line one by line six But then we have the caution if you were under age 24 at the end of the year and meet the conditions described in the instructions You can't take the refundable American opportunity credit and then it says skipped line eight into the amount from line seven on line nine So generally we have the amount here 2,500 but then we can put the if we if we have one of those conditions We check the box with the condition so here you can see we got the calculation for for the refundable American opportunity credit at the 1,000 and then the non refundable component down here, which you could see flowing in ultimately to the form 1040 on page number two, we've got the 1,500 up top and then we've got the we've got the 1,000 down below I got the wrong I had the check at the wrong amount and then if I go back on over and We say okay, I'm gonna put the check here. I'm gonna check that box off We got no calculation in line eight and basically we're in the non refundable education credits here So if this pulls over again to the form 1040 and I go to page number two You can see it's all up top here in the non refundable Area and nothing is basically down here Which means it could be limited based on your your tax liability if it's up top here So for example if I bring the if I bring the tax liability down to 20,000 or I mean the income down to 20,000 now It's it's gonna be limited here to the income and if I go back then to this page To the actual form so that's gonna be the limitation Completed here with the worksheet and if I uncheck this if I go back on over and uncheck that Now we have once again line eight being completed and it's broken out between the refundable and non refundable So if I go back on over to the 1040 page number two, we're still limited up top But we now we've got this 1,000 that is the refundable component And that's the benefit of that kind of refundable component on down below Okay, so back back to it. We're gonna say number one Were you under age 24 at the end of 2021 if no stop here You do a qualified to claim part of the allowable American opportunity credit as refundable credits If yes, go to question number two question number two. Were you age 18 at the end of? 2021 if yes, go to question three if no go to question four question three Were you a full-time student defined later for? 2021 if no stop here You do not qualify to claim part of your allowable American opportunity credit as refundable If yes, go to question five Were you age 18 at the end of? 2021 if yes, go to question five if no go to question six Line number seven continued number five was your earned income to find later Lested one half of your support to find later for 2021 if no stop here You do not qualify to claim part of your allowable American opportunity credit as refundable if yes Go to question number six number six We're either your parents alive at the end of 2021 if no stop here You do not qualify to claim part of your allowable American opportunity credit as refundable credit if yes Go to question seven and number seven. Are you filing a joint return for? 2021 if no, you don't qualify to claim part of the allowable American opportunity credit as refundable credit If yes, you do qualify to claim part of your allowable American opportunity credit as refundable caution The educational institutions EIN must be provided online 24 a so if we take a look at 24 a On the tax return here. We're looking page number two 24 a we've got the EIN number that should be on the documentation received from the institution on the 1090 8t that we're going to be provided. We should have then the EIN number in it Then we have the earned income earned income includes wages salaries professional fees and other payments received for personal services Actually performed earned income includes the part of any scholarship or fellowship grant that represents payment for teaching Research or other services performed by the student that are required as a condition for receiving scholarship or Fellowship grant. So if you get a grant, but it's really kind of compensation Then it should be compensation And of course if that were the case you would hope then the institution the educational institution would give you the proper Documentation to reflect that so you could put it in to this return properly So you want to talk to the institution about those kind of things earned income doesn't include that part of the compensation For personal services rendered to a corporation which represent a distribution of earnings or profits rather than a reasonable allowance as Compensation for the personal services actually rendered if you're a sole proprietor or a partner in a trade or business in which both personal services and capital or material income producing factors earn income also includes Reasonable allowance for compensation for personal services But not more than 30% of your share of the net profits from that trader business after Subtracting the deduction for one half of the self-employment tax However, if capital isn't an income producing factor and your personal services Produced produced the business income the 30% cent limit doesn't apply Support so what a support mean when we're talking about the support tests here Support includes food shelter clothing medical and dental care education and the like Generally the amount of item of support will be the amount of expenses paid by the one furnishing such item if the item of support is in The form of property or lodging Measure the amount of such item of support by its fair market value to figure your support Count support provided by you your parents and others. However a scholarship received by you isn't considered support If you were a full-time student defined next for 2021. So what does it mean to be a full-time student? solely for purposes of determining whether a scholarship is considered support You were a full-time student for 2021 if during any part of any five calendar months during the year You were enrolled as a full-time student at an eligible educational institution defined earlier or took a full-time On-farm training course given by such an institution or by a state county or local government agency So usually the actual educational institution will have the definitions of a full-time student because it's not totally standardized It's kind of standardized by institution But you might have semesters versus quarters, you know and so on So you want to make sure that you talk to the institution as to what it means to be a full-time student