 Income tax 2021-2022 education credits adjusted qualified education expenses. 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 8863-2021 instructions on the IRS website IRS.gov IRS.gov income tax formula. We're down here in the credit area of the formula noting that both deductions and credits are good. But if you had a dollar deduction versus a dollar credit, the credit would typically be better because you get the full dollar worth of credit. Whereas the dollar deduction would be just a decrease to the tax or income and then the tax would be calculated upon it. The credits are typically broken out into two categories. Non-refundable credits, refundable credits, non-refundable credits, not typically taking the tax liability below zero. Whereas the refundable credits may and if did, then it wouldn't really be a refund you're getting at that point. Even though it might still be called a refund, it's more like a benefit program at that time. We also might have some credits that have a non-refundable and refundable component to them. This is the form 8863, the education credits form, American opportunity credit, lifetime learning credit. Remember that we kind of combine those squish them together here because we want to see if we have qualifying expenses. If we could first qualify for the American opportunity credits because it's typically better, giving us more benefit. And then if we can't get it, we go for the lifetime learning credit. That's the general thought process. Page two of the form 1040, we're flowing into this is the non-refundable section or component. It would flow into schedule three and then to line 20 on page two of the form 1040 amount from schedule three. And then this is the bottom of the form 1040 page two. This is the refundable section where we have line 29, the American opportunity credit from form 8863. So education credits adjusted qualified education expenses for each student reduce their qualified education expenses paid in 2021 by or on behalf of that student under the following rules. The result is the amount of the adjusted qualified education expenses for each student. So example number one, last year your child graduated from high school and enrolled in college for the fall semester. You and your child meet all the other requirements to claim the American opportunity credit and you need to determine adjusted qualified education expenses to figure the credit. Your child has $5,000 of qualified education expenses and $4,000 of room and board. Your child received a $5,000 Pell Grant and took out a $2,750 student loan to pay these expenses. You paid the remaining $1,250 the Pell Grant by its terms may be used for any of these expenses. So the Pell Grant you could use for any of the expenses that we're taking into consideration here. If you and your child chose to apply the Pell Grant to the qualified education expenses, it will qualify as tax-free scholarship under the rules discussed in chapter one of publication 970. So now you've got this Pell Grant, the Pell Grant then was used to pay for possible education expenses. And so you got kind of free money that you're not having to pay income taxes on because you got the money didn't have to record it as income. Then you're thinking the government is going to be thinking well then you shouldn't really be able to use that money that then you then paid for the education expenses because you'd be kind of like double dipping. You got free income to pay for the expenses and then if you were able to get the credit for it too that would be kind of like getting two benefits from the same thing. And so that's what they typically try to stop people from doing because that just makes sense. So your child won't include any part of the Pell Grant in gross income. So after reducing qualified education expenses by the tax-free scholarship, you will have zero. That's 5,000 minus 5,000 of adjusted qualified education expenses available to figure your credit. Your credit will be zero. So that seems fairly straightforward but it's a little bit more nuanced than we might think because notice how they kind of qualify this. They said your child has 5,000 of qualified education expenses and 4,000 of room and board. Now the grant that they're getting, they're saying you can apply then the grant to things like the room and board. That's kind of what the Pell Grant was provided for but the room and board for the purposes of the credit is going to be a personal expense. So not typically something that you can include. So even though you're basically saying I took the Pell Grant and applied part of it to the room and board, we're still saying that you're going to have to, for the credit purposes, you got to apply it basically to the credit. So you can see what happened here. Your child received a 5,000 grant and took out a 2,750 student loan to pay these expenses, which include the 4,000 of room and board, which for the credit purposes is kind of like a personal expense. You paid the remaining 1,250 so the Pell Grant by itself may be used for any of these expenses. So that's the key. The grant could be used for any of them but you can only, you can't use all of them for the calculation of the amount that you paid and so therefore you got to use the grant to reduce the 5,000. That's why you end up with the zero amount here because you're removing that kind of room and board component. So in essence, if you get the grant, then oftentimes that might result in you having to lower the amount that you would otherwise be including in the payments for the qualified expenses. Example two, the facts are the same as an example one. If unlike example one, you and your child chose to apply only $1,000 of the Pell Grant to the qualified education expenses and to apply the remaining 4,000 to room and board, only 1,000 will be qualifying as a tax-free scholarship. So your child will include the 4,000 applied to room and board in gross income and it will be treated as earned income for purposes of determining whether your child is required to file a tax return. If the 4,000 is your child's only income, your child won't be required to file a tax return. So after reducing qualified education expenses by the tax-free scholarship, you will have 4,000, 5,000 minus 100, two of adjusted qualified education expenses available to figure your credit. Your refundable American opportunity credit will be $1,000. Your non-refundable credit may be as much as $1,500, but depends on your tax liability. Now this might be a beneficial way to go if like you don't have a lot of income for example because you have that refundable portion of the credit. So the fact that you're going to have to record 4,000 of what would have been income that wouldn't be subject to tax as income isn't a big deal if your income is quite low and then you might be able to get access then to the refundable portion of the credit by being able to apply that amount to the credit. So if you're not otherwise required to file a tax return, you should file it to get the refund of your 1,000 refundable credit, but your tax liability and non-refundable credit will be zero. Note the result may be different if your child has other income or if you're the student. If you're the student and you claim the earned income credit, that's the other big refundable credit, choosing not to apply a Pell Grant to qualified education expenses may decrease your earned income credit at certain income levels by increasing your adjusted gross income. Now notice that that earned income is that earned income credit actually goes up to some degree as your earned income goes up and then it flattens off and it goes back down. So the fact that now you have this kind of situation where you have this money which you can either apply one way and it would basically be resulting in non-taxable income. And if you apply it another way that could result in it being included in income may have an impact on your earned income credit, which actually goes up as earned income goes up and then it flattens off and then it goes back down. So it's another kind of thing that you can test out and that's useful to have software to kind of look into that. Unlike a scholarship or fellowship grant, a tax-free distribution from a Coverdale ESA or Qualified Tuition Program, Section 529 plan can be applied to either qualified education expenses or certain other expenses such as room and board without creating a tax liability for the student. So if you put money into the Coverdale ESA then it's a little bit different than it's designed. That thing, that tool is designed to pay for these items including the room and board. So you don't have to then, if applying it to the room and board, do what we just talked about which would be included in income in that instance. An education credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdale ESA or Qualified Tuition Program as long as the same expenses aren't used for both benefits. For details there you can take a look at publication 970 chapter 7 and 8. You can find that on the IRS website. Tax-free educational assistance treated as a refund. Some tax-free educational assistance received after 2021 may be treated as a refund of qualified education expenses paid in 2021. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2021 for qualified education expenses paid on behalf of a student in 2021 or attributable to the enrollment at an eligible educational institution during 2021. If this tax-free educational assistance is received after 2021 but before you file your 2021 income tax return see refunds received after 2021 but before your income tax return is filed later. If this tax-free educational assistance is received after 2021 and after you file your 2021 income tax return see refunds received after 2021 after your income tax return is filed later. So you can see where this kind of problem comes into play. If you've got the refund that happens then the question is well did the refund take place in the same tax year and you knew about it which means you could take it into consideration in the same tax year or is it something that happened after you filed the return in which case that you might have different circumstances to take care of it or think about what to do with it in the following tax year. Refunds and refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay or recapture the credit that you claimed in an earlier year. So you can imagine what happens here similar with like the state tax refunds we talked about if you get a benefit in the current tax year and then in the next tax year you get a refund well now you got a benefit from the credit in the prior year and then you didn't really spend that money because you got a refund so what do you do at that point do you amend the prior tax year to fix the fact that you didn't really pay that money or more likely we would like to fix it in the current year when you got the refund. So some tax free educational assistance received after 2021 may be treated as a refund. See tax free educational assistance earlier refunds received in 2021. So we're talking about 2021 tax year and you got the refund in 2021. For each student figure the adjusted qualified education expenses for 2021 by adding all of the qualified education expenses paid in 2021 and subtracting any refunds of those expenses received from the eligible educational institution during 2021. So if you got a refund you might have to ask the institution say hey is this refund included in my documentation that you provided to me or not that you already do the decrease hopefully my form the 1098T is properly calculated by the institution but if not then you then you got to take that into consideration. Refunds received after 2021 but before the income tax return is filed. So now it's you haven't filed tax return 2021 you got the refund in 2022 but you have not yet filed. If anyone receives a refund after 2021 of qualified education expenses paid on behalf of a student in 2021 and the refund is received before you file your 2021 income tax return reduced the amount of qualified education expenses for 2021 by the amount of the refund. So you should still be able to take care of it in the tax year when you're filing for the credit 2021. That would be the easiest thing to do usually refunds received after 2021 and after the income tax return is filed. So now you got the refund in 2022 and you already got the benefit of the amount that was paid in 2021. If anyone receives a refund after 2021 of qualified education expenses paid on behalf of a student in 2021 and the refund is received after you file your 2021 income tax return you may need to repay some or all of the credit that you claim. You can see the credit recapture calculation. So here it is the credit recapture calculation paying it back. If any tax free educational assistance for qualified education expenses paid in 2021 or any refunds of your qualified education expenses paid in 2021 is received after you file your 2021 income tax return. You must recapture repay any excess credit. So you do this by refiguring the amount of your adjusted qualified education expenses for 2021 by reducing the expenses by the amount of the refund or tax free educational assistance. So basically you got to go back in and say OK what if my if I recalculate it on the proper amount after I take into consideration this refund then I'll figure what that is that what that amount is. You then figure your educational credits for 2021 and figure the amount by which your 2021 tax liability would have increased if you had claimed the refigured credit. So what would my tax liability be if I took this refund into consideration in tax year 2021 include that amount as an additional tax for the year refund or tax free assistance was received most likely in 2022. So we're not going to amend the prior tax return but we're going to go back to the prior tax return calculation calculating the credit under the 2021 rules. After having taken into consideration the refund as if we got the refund in 2021 and then try to fix it in 2022 by adding it to other taxes. Example you paid $8000 tuition and fees in December 2021 for your child's spring semester beginning January 2022. You filed your 2021 tax return on February 2nd 2022 and claimed a lifetime learning credit of $1600. That's 8000 qualified education expense paid times 20%. You claimed no other tax credit after you filed your return. Your child withdrew from two courses and you received dang kid. What was what's wrong with that kid? I paid and it's okay. It's okay. Whatever you claim no other tax credits after you filed your return your child withdrew from two courses and you received a refund of 1400. You must figure your 2021 lifetime learning credit using 6600. So then if you got to refund now you got to refigure it because because they didn't finish this thing I paid for. Anyway, 8000 qualified education expenses minus the 1400 refunded the refigured credit is 1320 and your tax liability increased by $280. So you got to recalculate it. I'm at the 280 you must include your difference of 280 which is the 1600 credit originally claimed minus the 1320 refigured credit as additional tax on your 2022 income tax return. So see the instructions for your 2021 income tax return determine whether to include this tax tip. If you paid qualified education expenses in both 2021 and 2022 for an academic period that begins and the first three months of 2022 and you receive tax free educational assistance or a refund as described above. You may choose to reduce the qualified education expenses you paid in 2022 instead of reducing the qualified education expenses paid in 2021. If you're in that kind of cut off overlap area. Eligible educational institution. What is that? What are those things? What's a qualified institution? An eligible educational institution is generally any accredited public nonprofit or proprietary private college university. They vocational school or other post secondary institution. Also the institution must be eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited post secondary educations meet this definition. An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program administered by the Department of Education. Tip, an educational institution should be able to tell you if it is an eligible educational institution. So you might want to get a third party and not be completely reliant on the person that you're going to be paying the tuition to but the educational institution is usually well aware that they qualify as an educational institution and willing to inform you of that. So you know when you're thinking about signing up for the tuition or something like that so you should have an idea of that there. So additional information see publication 970 chapters 2 and 3 for more information about these credits.