 Income Tax 2022-2023 Education Credits Overview. Let's do some wealth preservation with some tax preparation. Most of this information comes from instructions for Form 8863 Education Credits American Opportunity and Lifetime Learning Credits Tax Year 2022. You can find on the IRS website irs.gov, irs.gov, looking at the income. 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. Tax formula, we're at the bottom here looking at the credits area. Remember in the first half of the income tax formula is in essence an income statement. Although a strange one, the bottom line being the taxable income similar to net income, the bottom line of a normal income statement. We then calculate the tax on the taxable income, not with one rate, not with a flat tax, but instead with a progressive tax system to get to the tax before credits and other taxes. Then we're finally getting to that credit area as well as other taxes, which could be like self employment tax, for example. Then we have to deal with the payments, which will be the format of withholdings or estimated tax payments to get to the bottom line tax refund or tax due. Remember, credits are like deductions in that we like them both. But if we can get a dollar credit or a dollar deduction, we would have rather have usually the dollar credit because usually we would get the full dollar benefit as opposed to a dollar deduction, which would simply be decreasing by a dollar taxable income. The benefit would be dependent on our tax rate. Also remember that the credits down here are broken out into the non refundable and refundable credits. The non refundable credits do not take the tax liability below zero. The refundable credits do making the refundable credits using the tax code more like a welfare or benefit program as opposed to a tax system. Once you go past that point to the refundable part. Okay, reminders about the education credits. Limits on modified adjusted gross income, the MAGI. Remember that as we look at these credits, the income, as income goes up, sometimes the credits will phase out. We don't base that on the gross income, but rather the AGI, the adjusted gross income. M just means that we're going to take that AGI and modify it for certain things related to this particular credit. So it's pretty much like the AGI slightly adjusted, in essence. So the lifetime learning credit and the American opportunity credit MAGI, Modified Adjusted Gross Income Limits are 180,000 if you're married, filing jointly, 90,000 if you're filing single, head of household or qualifying surviving spouse. See table one and the instructions for line three or line 14. Then you've got the form 1098T requirement. That's the form that the financial, I mean, the educational institution, the financial department of the educational institution will typically give you reflecting the payments usually being the tuition. So to be eligible to claim the American opportunity credit or lifetime learning credit, the law requires taxpayers or a dependent, dependent on who had the education to have received form 1098T tuition statement from an eligible educational institution, whether domestic or foreign. That's kind of similar to like a W-2. For example, the institution is going to be providing this to you. The government also is making them provide it to them so that they are basically looking over your shoulder. That's why it's kind of a requirement because they can basically double check that. However, you may claim one of these education benefits if the student doesn't receive a form 1098T because the student's educational institution isn't required to furnish a form 1098T to the student under existing rules. For example, if the student is a qualified non-resident alien, has certain qualified education expenses paid entirely with scholarships, has certain qualified education expenses paid under a formal billing arrangement, or is enrolled only in courses for which no academic credit is awarded. Alright, so if a student's educational institution isn't required to provide a form 1098T to the student, so you may claim one of these education benefits without a form 1098T, if you otherwise qualify, can demonstrate that you or a dependent were enrolled at an eligible educational institution and can substantiate the payment of qualified tuition and related expenses. So the bottom line is you will normally get a 1098T from the institution. If you don't, you want to check with them to get the 1098T because they're usually going to send one to the IRS as well. If you're in an unusual situation, then you might have some unusual situations where they don't send out the 1098T, in which case you could go to verify and see if you could still claim at that point. So you may also claim one of these educational benefits if the student attended an eligible educational institution required to furnish form 1098T but the student doesn't receive form 1098T before you file the tax return. For example, if the institution is otherwise required to furnish the form 1098T and doesn't furnish it or refuses to do so and you take the required following steps after January 31st, 2023 or before you file the return, you or the student must request that the educational institution furnish form 1098T. So obviously, it's kind of similar to a 1099T. If the person that issues it doesn't issue it or gets it wrong, then you've got to go to them and see if they can issue it, pressure them to issue the form properly because again the IRS is going to get it on their side as well and they want to basically be able to double check things on their side. You must fully cooperate with the educational institution's efforts to gather the information needed to furnish the form 1098T so if the financial institution says I can't do it because you won't give me your address or email or whatever for me to send it to you, well then that's kind of your fault. You have to give them the information. Splendid! Just give your information to Mrs. Pennyapple. It's necessary for them to process the form 1098T. You must also otherwise qualify for the benefit be able to demonstrate that you or a dependent were enrolled at an eligible educational institution and substantiate the payment of qualified tuition and related expenses. The amount of qualified tuition and related expenses reported on form 1098T may not reflect the total amount of the qualified tuition and related expenses paid during the year for which you may claim an education tax benefit. So note the amount on the 1098T you would think the reason the IRS basically requires it is because that will require the baseline amount that you were indeed enrolled in an educational institution. However, that 1098T you would think would generally be reporting the expenses that are related to the tuition. You might have other more expensive expenses that you can basically possibly deduct that aren't on the 1098T maybe but the IRS still wants that 1098T to be a requirement to qualify at all because that's going to give them an idea that you were at least enrolled in the financial institutions. In other words, if you're claiming books or something like that that you had to purchase or something for the financial and for the school then they would like to at least prove that you'd paid tuition to the school and therefore it would make sense that you're buying books for school. If they can't confirm that then it'd be hard for them to confirm anything. Okay, you may reflect the total amount so we looked at that. You may include qualified tuition and related expenses that are not reported on form 1098T when claiming one of the related credits if you can substantiate payment of these expenses. You may not include expenses played on the form 1098T that have been paid by qualified scholarship including those that were not processed by the university. So then the amounts that are on the 1098T you could have some issues with them when we get into like the scholarship where they paid by a scholarship not by you in that case they weren't really an expense to you and you would think you wouldn't get a credit related to them in that case because they were paid by scholarships so caution to claim the American Opportunity Credit you must provide the educational institutions employer identification number EIN on form 8863 you should be able to get that from the institution. You should be able to get this information from form 1098T or form 1098T when you pop like that or the educational institution ban on claiming the American Opportunity Credit. If you claim the American Opportunity Credit even though you're not eligible you may be banned from claiming the credit depending on your conduct. So see the caution statement under American Opportunity Credit later. So these credits are the types of things that like scammers and people that are trying to commit fraud or something like that on the taxes are likely to try to take advantage of and so the IRS is going to put restrictions on possibly or ban if they feel that you've tried to abuse the American Opportunity Credit. So taxpayers identification number the TIN needed by due date of return. So if you haven't been issued a TIN by the due date of your 2022 return including extensions you can't claim the American Opportunity Credit on either your original or amended 2022 return. Also the American Opportunity Credit isn't allowed on either your original or amended 2022 return for a student who hasn't been issued a TIN by the due date of your 2022 return including extension. Hey, no extension cards. Then we've got the form 8862 may be required if your American Opportunity Credit was denied or reduced for any reason other than a math or clerical error for any tax year beginning after 2015 you must attach a completed form 8862 information to claim certain credits after disallowance. So that would be hopefully an unusual situation to your tax return for the next tax year for which you claim the credit C form 8862 and its instructions for details. Purpose of form use form 8862 to figure and claim your education credits which are based on adjusted qualified education expenses paid to an eligible educational institution post secondary. That's the general concept post secondary institution for 2022. There are two education credits. So here's where it gets a little bit confusing because now we've got these payments to education benefits. Remember the general rule of an income tax is that we would get to deduct. You would think those things that we needed to help generate revenue but then the tax code has all these other things that they put in place to try to incentivize people in the form of either deductions or credits and both education being one of those and you can imagine you know multiple different laws where they kind of overlap on could you take these expenses as a deduction could you take them as a credit and now we have these two credits they kind of came came about as time has passed and we kind of think of them together now because one credit is typically better than the other if you qualify it although most stringent to qualify for so the credits are then the American opportunity credit part of which you may may be refundable meaning it takes the tax liability basically below zero and then you've got the lifetime learning credit which is non-refundable. So in almost every way if you qualify for the American opportunity credit it will be better off. It's usually a bigger dollar amount and you may have a refundable portion if you need it taking the tax liability below zero still resulting in a benefit or refund even if you don't own a tax past that point whereas the lifetime learning credit is usually a lesser dollar amount and non-refundable it's not going to take your tax liability below zero. So when thinking about qualifying for these credits we usually think of them kind of together now you know you're going to try for the American opportunity credit and then default to the lifetime learning credit is the general idea. Okay a refundable credit can give you a refund when the credit is more than the tax you owe even if you aren't required to file a tax return a non-refundable credit can reduce your tax but any excess isn't refunded to you. Both of these credits have different rules that can affect your eligibility to claim a specific credit these differences are shown on table one. So here's basically a list let's go through a quick kind of rundown of these two credits remember the general idea though being that you're going to think first if you could take the American opportunity credit and then lifetime learning will go through each of them in detail but when you're imagining them in your mind that's your thought process you're going to try to see if I can get one then the other usually. Alright so the maximum credit for the American opportunity credit up to 2,500 credit per eligible student whereas the lifetime learning credit up to $2,000 credit per return big difference per student per return so the next one limit on modified adjusted gross income or the MAGI the phase out of your income level phase out 180,000 for the American opportunity credit if married filing joint 90,000 if single head of household or qualifying surviving spouse whereas the lifetime learning credit also 180,000 if married filing joint 90,000 if single head of household so same items there refundable or non refundable American opportunity credit 40% of the credit may be refundable taking the liability even below zero resulting in a benefit resulting in a refund even if you don't owe any tax passed that point the rest is non refundable so only 40% whereas the lifetime learning non refundable credit is limit to the amount of tax you must pay on your taxable income next one we have the number of years of post secondary education so the American opportunity credit available only if the student had not completed the first four years of post secondary education for 2022 so we're limited there whereas the lifetime learning available for all years of post secondary education and for course to acquire or improve skills so much more expansive on the lifetime learning there which means you might cap out on what you can take in terms of the number of years American opportunity but you could keep on possibly taking the lifetime learning after that point number of tax return credit available so American opportunity credit available only for four tax years per eligible student so you only have the four years that you could take that because that's the general time frame of post secondary college in essence and then on the lifetime learning available for an unlimited number of tax years then you've got the type of program required American opportunity credit student must be pursuing a program leading to a degree or other recognized education credential whereas the lifetime learning credit student doesn't need to be pursuing a program leading to a degree or other recognized education credential and next one number of courses American opportunity credit student must be enrolled in at least half time for at least one academic period beginning during 2022 or the first three months of 2023 if the qualified expenses were paid in 2022 you've got a bit of that timing difference we'll talk about more detail later but that's the general idea lifetime learning available for one or more courses so much less restriction on the lifetime learning then the number of courses that you need to take for the American opportunity credit felony drug convention conviction as of the end of 2022 the student had not been convicted of a felony for possessing a distributing controlled substances so they kind of threw this one in there has nothing to do really with education and whatnot but you know they threw that in there whereas the lifetime learning felony drug convictions don't make the student ineligible qualified expenses tuition required enrollment fees and course materials this is the lifetime learning side that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance whereas the lifetime lifetime learning credit tuition and required enrollment fees including amounts required to be paid to the institution for course related books supplies and equipment so this one's more broad on the American opportunity credit side of things because these are the amount of expenses which means the possible deduction is more likely to be higher because you have more things that might be included as qualified expenses a little bit more restricted a lot more restricted on the lifetime learning credits then we've got payments for academic periods the American opportunity credit payments made in 2022 for academic periods beginning this is both of them into in 2022 or beginning in the first three months of 2023 so you've got this timing thing because you might prepay you might say hey look I paid for it in 2022 but the classes don't start until 2023 well for usually we're on a cash basis for taxes so usually that that's going to be okay but the IRS doesn't want you to take advantage of that by coming up to an agreement with the school that you're going to pay like five years in advance to take a bigger credit this year or something like that so so you have this limitation on that kind of cut off and then we've got the TIN needed by filing due date American opportunity credit filers and students must have been issued a TIN by the due date of their 2022 return lifetime learning credit students must have been issued a TIN by the due date of the 2022 return and then the educational institutions EIN American opportunity credit the you must provide the educational institutions employer identification number that that's usually going to be given to you in the form but that's the EIN it's going to be put on form 8863 usually not a problem and lifetime learning credit educational institutions employer identification number is not required on form 8863 alright who can claim an education credit you may be able to claim an education credit if you your spouse or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution so you're talking about obviously if it's yourself then you paid for the for the educational expenses if it's someone that is a dependent that's when it gets a little bit more confusing but you would think that if you were claiming them on your tax return and you paid for their education expenses then they would be included too so once again you may be able to claim an education credit if you your spouse or a dependent you claim on your tax return was a student enrolled at or attended an edgy an eligible educational institution for 2022 the credits are based on the amount of adjusted qualified education expenses paid for the student in 2022 for academic periods beginning in 2022 or beginning in the first three months of 2023 academic I'm an academic period an academic period is any quarter semester trimester or any other period of study as reasonably determined by an eligible educational institution if an eligible educational institutions uses credit hours or clock hours and doesn't have academic terms each payment period may be treated as an academic period for details see at academic period in chapter two and three of publication 970 so the academic periods are standardized to some degree but different institutions have different different periods but usually quarter semester trimester are what you will see who can claim a dependent's expenses if a student is claimed as a dependent on another person's tax return all qualified education expenses of the student are treated as having been paid by that person therefore only that person can claim an education credit for the student so once again if a student is claimed as a dependent on another person's tax return all required education expenses of the student are treated and having been paid by that person therefore only that person can claim an education credit for the student if a student isn't claimed as a dependent on another person's tax return only the student can claim the credit which kind of so it kind of of course kind of makes sense here obviously if the student is a dependent of someone else you would think then part of being a dependent would be that they're they're paying over half of the of of the expenses and so on so you would think whoever's claiming them as a dependent would be the one likely being able to take the credit whereas if the student isn't being claimed as a dependent then they would be able to claim themselves or take the credit in that case so expenses paid by a third party qualified education expenses paid on behalf of the student by someone other than the student such as a relative are treated as paid by the student which makes sense because if it wasn't that way let's say you had you know a rich uncle or something like that paid for the tuition for a student then who would get the credit the uncle couldn't because they're not claiming the student as a deduction and and that would be a mess right so that that would mean they would have to give the money either to the to the parents who are claiming them as a dependent or the students themselves and then the student would have to pay for the expenses but the uncle might want them to as a condition to spend the money on school or something like that so it would so it would kind of make sense that someone would get the credit and whoever's claiming the student whether it be the student themselves or the parents for example and not the third party you would think would still be able to get a benefit of the credit okay so once again qualified education expenses paid on behalf of the student by someone other than the student such as a relative are treated as paid by the student however qualified education expenses paid or treated as paid by student who is claimed as a dependent on your tax return are treated as paid by you so if this if the student paid for the tuition and the student was was a dependent of someone you would basically it wouldn't be right you would think to say well now the student can't claim the deduction because they're a dependent but they're the one that paid the tuition and now the parent doesn't get that even though as a dependent they you would think that they are still providing the financial support of the student so again it's just kind of a logistical thing in terms of who actually paid the the tuition you would think someone would get the benefit and you would think the person who gets the benefit is the person who's claiming the student as a dependent or the student themselves if they're not being claimed as a dependent anywhere else therefore you're treated as having paid expenses that were paid by the third party for more information and an example see who can claim a dependent's expenses in publication 970 chapter 2 and 3 we'll take a look at that more later most likely who cannot claim a credit you cannot claim an education credit on a 2022 tax return if any of the following apply one you're claimed as a dependent on another person's tax return such as your parent's return so if you're claimed as a as a dependent on someone else's tax return then you would think that there are the ones that might be able to get the benefit of the credit to your filing status is married filing separately so we've got the same kind of thing if you're married you can't go back to single you gotta file a married filing joint or married filing separately the IRS is optical of people married filing separately taking advantage of the credit especially with the AGI limitations and the phase outs so often times you lose some of the credits that you may otherwise get by filing married filing separately therefore it would be more beneficial generally to file married filing joint if you're subject to these kind of credits so 3 you or your spouse were a non-resident alien for any part of 2022 and didn't elect to be treated as a resident alien for tax purposes for your MAGI modified adjusted gross income your income level is $180,000 or more if married filing jointly or $90,000 or more if single head of household or qualifying surviving spouse with dependent child 5 the student has not been issued a TIN by the due date of their 2022 return including extensions generally your MAGI modified adjusted gross income is the amount on your form 1040 or 1040 SR line 11 your AGI however if you're filing form 2555 this is where the modification comes in the M foreign earned income or form 4563 exclusion of income for bona fide residents of America Samoa or are excluding income from Puerto Rico add to the amount on your form 1040 or 1040 SR line 11 the amount of income you excluded for details there if you have to dive into that more detail look at publication 970 tax software hopefully can help out with those situations as well.