 Income tax 2022-2023. Lifetime learning credit. Figuring the credit. Let's do some wealth preservation with some tax preparation. Most of this information comes from Publication 970. Tax benefits for education. Tax year 2022. You can find on the IRS website irs.gov irs.gov. Looking at the income tax formula, we're at the bottom where the credits are located. Remember in the first half of the income tax formula is in essence an income statement ending at taxable income similar to the bottom line of a normal income statement net income. We then calculate the tax on the taxable income not using one rate or a flat tax but rather using the progressive tax system to get to the tax before credits and other taxes. Finally then we're down to where the credits are at as well as other taxes like self-employment tax and then we apply the payments which might be in the form of withholding or estimated tax payments to get to the tax refund or tax due. Also remember that the credits are similar to deductions and that we'd like them both but if we can get a dollar credit or dollar deduction we would rather have the credit use support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable so once again click the link below for a free month membership to our website and all the content on it. Usually because we'll usually get the full benefit of the dollar credit as opposed to the dollar deduction which only reduces the taxable income and our credit our benefit will be dependent upon the tax rate. Also the credits down below have a non-refundable portion and a refundable portion oftentimes we break the credits out into non-refundable and refundable. Non-refundable means we can't take the credit liability below zero meaning we're not going to get a refund if the tax liability goes below zero the refundable portion means that we can do that resulting in the tax code being used not as a tax system in that case but as a will for or benefit program for that refundable portion of a credit. Figuring the credit noting that we're looking at the lifetime learning education credit there's two major education credits the other one being the American opportunity credit our thought process generally being one can I qualify for the education credit if I cannot then two I'm going to default to the second credit that being the lifetime learning credit which is our focus here in other words the qualifications to be able to get the American opportunity credit are more restrictive than the qualifications to be able to get the lifetime learning credit so now we're figuring the lifetime learning credit the general assumption is that we couldn't qualify for the American opportunity credit we've talked about the American opportunity credit in prior presentations all right the amount of the lifetime learning credit is 20 percent of the first ten thousand dollars of qualified education expenses you paid for all eligible students so we've talked about what does it mean to be an eligible student what are the education expenses once we have the education expenses that's where we're at now to calculate the credit and if we take 20 percent of a ten thousand ten thousand is the cap of those education expenses times point two we have a two thousand dollar credit the maximum amount of the credit now the American opportunity credit you'll recall the maximum amount was two thousand five hundred dollars it was also easier to get to that two thousand five hundred maximum amount for the American opportunity credit because you only needed basically four thousand in order to maximize the qualified education expenses to get there and the things that qualified for the education expenses were a bit more encompassing than what qualifies for the lifetime learning qualified education expenses so here you got to have a pretty hefty number of the ten thousand dollars qualified education expenses in order to maximize the potential credit at the two thousand dollars okay so the maximum amount of lifetime learning credits you can claim for two thousand twenty two is two thousand that's twenty percent of ten thousand however that amount may be reduced based on your MAGI that's the modified adjusted gross income the income phase out which is generally not on gross income but the adjusted gross income with the slight modification which is usually due to like foreign income type of thing so it could be lower than that based on the income level see effect of the amount of your income on amount of credit later all right example bruce and tani are married and file a joint tax return for two thousand twenty two their MAGI modified AGI is seventy five thousand so that's below the threshold to basically be phasing out tani is attending a local college an eligible educational institution to earn credits toward a degree in nursing tani already has a bachelor's degree in history and wants to become a nurse in august two thousand twenty two tani paid five thousand dollars of qualified education expenses for the fall two thousand twenty two semester bruce and tani can claim a one thousand dollar which is twenty percent of that five thousand remember that she would have to get up to the ten thousand in order to max out the credit at the two thousand so so she's they get the one thousand lifetime learning credit on their two thousand twenty two joint tax return so the reason we're not at the maximum of two thousand in this case is not due to the income threshold it being phased out because of a higher income but rather because we didn't get to the maximum of ten thousand qualified expenses to maximize the calculation of twenty percent of that all right so form 1098 t to help you figure your lifetime learning credit the student made receive form 1098 t generally an eligible education institution such as a college or university must stand form 1098 t so if you don't get the 1098 t then you want to talk to the college or university so or acceptable substitute to each enrolled student by january 31st 2023 so it should get their first month of the following tax year so an institution will report payments received box one for qualified education expenses however the amount on form 1098 t might be different from what you paid when figuring the credit use only the amounts you paid or are deemed to have paid in 2022 for qualified education expenses in other words the 1098 t is a pretty good reference and it should hopefully be accurate you know for most people in terms of what you have paid but we've talked about what qualifies as education expenses in prior presentations and the 1098 t might not pick up or exactly pick up all the different qualification components the reason the irs wants to make sure that a 1098 t is given isn't solely so you can tie into that number as is the case for other kind of documentation like a w2 where if you don't tie into the number you will almost surely get an audit kind of situation but but the 1098 t can still verify to the irs that if you're claiming the credit at least they can verify that you attended uh some kind of qualifying you know institution even if the number on the 1098 t is not exactly what was used to calculate the credit so in addition form 1098 t should give other information for that institution such as adjustments made for prior years the amount of scholarship or grants so that'll help you to see if you need to decrease the amount by the grants if that was free money we talked about that in prior presentation reimbursements refunds and uh and whether their student was enrolled at least half time which is another requirement generally for the american opportunity credit which has different rules in that case than the lifetime learning credit or was a graduate student so the eligible educational institution may ask for a completed form w9s so you have to give them the information so that they can populate the form 1098 t the w9s like a w4 in essence when you're an employee is a request for that information or similar statement to attain the student's name address and taxpayer identification number effect of the amount of your income on the amount of your credit the amount of your lifetime learning credit is phased out gradually reduced if your magi modified adjust to gross income is between 80,000 and 90,000 so these are the numbers that you kind of want to keep in mind if you're like giving advice or talking about these credits you got to say well it's going to start phasing out 80 and 90,000 it's going to be 160,000 and 180,000 if you file a joint return and obviously one way to kind of think about that is that you know you would think it would be doubled for a joint return which in this case it is right because you'd have two people together so you think their income could possibly be doubled so if it's 80,000 we're going to 160 90,000 we're going to 180 so you can't claim a lifetime learning credit if your magi is 90,000 or more or 180,000 or more if you file a joint return so modified adjusted gross income what does that mean that's going to be the phased out number that's used not the gross income but the agi and then the modified agi so for most taxpayers the magi the modified adjusted gross income is adjusted gross in the same as agi in other words as figured on their federal income tax return magi when using form 1040 or 1040 sr if you file form 1040 or 1040 sr your magi is the agi online 11 of that form modified by adding back if any of these apply and tax software would help you know to calculate these oftentimes one foreign earned income exclusion two foreign household exclusion three foreign household deduction four exclusion of income by bona fide residents of american samoa and five exclusion of income by bona fide residents of Puerto Rico example you are filing a joint return with an magi of 161,000 in 2022 you paid 6600 of qualified education expenses you figure the tentative a lifetime learning credit which is 20 of the first 10,000 of qualified education expenses you paid for all eligible students so the result is a 6600 is what was paid which is under the 10,000 therefore the credit before we get into any phaseouts it's not at the 2,000 but rather at the 1,320 tentative credit and then because your magi your modified adjusted gross income is within the range of income where the credit must be reduced you must multiply your tentative credit 1,320 by a fraction the numerator top part of the fraction is 180,000 the upper limit of those filing a joint return minus the modified agi the denominator bottom part is 20,000 uh is 20,000 the range of income for phaseout 160,000 to 180,000 the result is the amount of your phase out so we probably don't need to know this calculation because software will help with this calculation and then you can kind of deconstruct from the software what we need to know is to be able to say and talk to people intelligently about well now if your income goes above a certain threshold it's going to phase out so if you can't get the american opportunity credit then you might take the lifetime learning credit although it takes more expenses to maximize out the credit you would need 10,000 dollars instead of 4,000 dollars to get the maximum credit amount of 2,000 instead of 2,500 and there's an income phaseout which will basically start and then phase completely out phases out fairly quickly after you hit that basically uh income threshold