 Income tax 2021-2022. Lifetime learning credits. Get ready to get refunds to the back. Stive in the income tax 2021-2022. Most of this information can be found in form 8863 instructions tax year 2021 IRS website irs.gov irs.gov. Income tax formula we're down at the bottom in the credit area noting that both credits and deductions are good but if you had a dollar credit versus a dollar deduction the credit would typically be better because you'd usually get the full dollars worth of the credit as opposed to the dollar deduction which would be a decrease to the taxable income resulting in the tax being applied to the taxable income. Also note that we have the two categories the credits we can think of those being the refundable credits and the non-refundable credits these are the non-refundable credits and the refundable credits the non-refundable credits don't take the tax liability below zero the refundable credits could result in in a refund if that were the case which isn't really a refund but more of like a benefit program in that instance. This is the form 8863 the educational credits the American opportunity and lifetime learning credits we typically think of them as kind of smushed together because you would typically be looking for first the American opportunity credit if you have educational expenses you're trying to get a tax benefit from because you get more of a benefit with it but if you can't get the American opportunity credit because it's more stringent in terms of the requirements then you'd be going for the lifetime learning credits. This is page two of the form 1040 in the non-refundable area line 20 this amount would flow into schedule 3 and then flow in here on line 20 this is the bottom of the 1040 where we have the refundable component on line 29 of the American opportunity credit from form 8863 line 8 so we're looking at the lifetime learning credit this is the second of the two credits this is the one that has less restrictiveness but has less benefits so you would first be going for the other one the American opportunity credit and if you couldn't get it then you'd say okay I'll default to the lifetime learning credit which is has more broad requirements and more likely that we could qualify for it so the lifetime learning credit equals 20% of the adjusted qualified education expenses defined later up to a maximum of 10,000 of adjusted qualified education expenses per return so you'd have to have 10,000 of them to max out the credit to take 20% would be 2,000 to get the maximum therefore the maximum lifetime learning credit you can claim on your return for the tax year is 2,000 regardless of the number of students who whom are you paid qualified education expenses so you might have like a bunch of people you know multiple people this time remember the last credit we calculated was per student whereas this time we're talking per tax return so if we had multiple students that are qualifying for the lifetime learning then we're capped out on a per tax return basis to that 2,000 so the amount of your credit for 2021 is gradually reduced otherwise known as the phase out if you're in AJI that's the modified adjusted gross income your income level is between 80,000 and 90,000 if you're not married in essence or 160,000 to 180,000 if you file a married filing joint return remember married filing separate causes problems with these kind of credit we talked about that earlier you cannot claim a credit if your MAGI is 90,000 if you're not married in essence or more 180,000 or more if married filing joint you cannot claim the lifetime learning credit for any student if you claim the American opportunity credit for the student you can't double dip you can't claim both credits for the same amount of the expenses so which one would you take if you could take them both you would take first the American opportunity credit because the benefit would be greater most of the time and if you can't then get that then you move over here to the lifetime learning credit qualified education expenses what are they generally qualified education expenses are amounts paid in 2021 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution so obviously the tuition would be the most clear-cut kind of component that you would think of for the qualified educational expenses it doesn't matter what the whether the expenses were paid in cash by check by credit or debit card or with borrowed funds so you might say well what I mean if I borrowed the money is it the same it doesn't matter how you basically pay for it so once again it doesn't matter whether the expenses were paid for with cash a check a credit by credit or debit card or with the borrowed funds qualified education expenses continued for course related books supplies and equipment only certain expenses qualify American opportunity credit qualified education expenses include amounts paid for tuition that's the straightforward when fees that's pretty straightforward and course materials that's where it gets a little bit more sketchy what does course materials need which include which include books supplies and equipment needed for the course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance so a lot of times they say you know you need this materials you need like these books and whatnot but they're not like required you could go to the course without the book but you would be woefully unprepared if that were the case generally if you did that most of time so that's the American opportunity credit and now we're looking at the lifetime learning credit which is a bit more restrictive the lifetime learning credit qualified educational expenses include amounts paid for books supplies and equipment only if required to be paid to the institution as a condition of enrollment so once again difference between the American opportunity and lifetime learning American opportunity credit more expansive with regards to what qualifies for the expenses so the American opportunity credit again include amounts paid for tuition fees and course materials which include books supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance whereas the lifetime learning credit qualified educational expenses include amounts paid for books supplies and equipment only if required to be paid to the institution as a condition of enrollment or attendance okay so the qualified education expenses include non-academic fees such as student activity fees athletic fees or other expenses unrelated to the academic course of instruction only if the fee must be paid to the institution as a condition of enrollment or attendance so that still seems fairly straightforward even though it's not tied in directly if it's a requirement to be paid you pay it and again those kind of payments you would expect then hopefully they would be reporting to you on on the documentation that the institution provides to you however fees for personal expenses described below are never qualified educational expenses so here's like the exceptions a note then when we looked at these educational expenses we're going to now be thinking okay they're going to give us the documentation which is at least going to give us the tuition and hopefully the tuition will be applied to the proper period we talked about the cutoff in the prior years so hopefully the institution will provide that and then we got to think about these other kind of things for qualified or these materials that we need to be adding and think well all of those items included in the documentation that the institution provides to us and if they are not do it could we include them in that instance and we might have differences in that case of course between the two types of credits that we're talking about so qualified education expenses don't include amounts paid for the following personal expenses this means room and board insurance medical expenses including student health fees transportation and other personal living or family expenses so no personal expenses any course or other education involving sports gains or hobbies or any non-credit course unless such course or other education is part of the students degree program or for the lifetime learning credit only helps the student to acquire or improve job skills so if it's a kind of a hobby thing it would be included but if it's going towards your your overall degree the credits then you would think it might then be included education expenses you may receive form 1098 T from the institution reporting payments received in 2021 box one however the amount in box one a form 1098 T may be different from the amount you paid or are treated as having paid so now you should be getting the form 1098 T and like we say that should have basically the tuition it should be included in there but as we see we've got these other things that may or may not be be added depending on the structure of the institution and how they make the payments and the requirements for it so you would think that you would need a 1098 T to tell you or as part of the requirement in most cases to be able to take the credits however the amount on the form 1098 T might not be the only amount that you that you would be picking up for the credits so to complete form 8863 use only the amounts you actually paid plus any amounts you're treated as having paid in 2021 reduce reduce as necessary as described under adjusted qualified education expenses later see chapter 2 and 3 of publication 970 for more information on form 1098 T so you can go to the publication 970 if you want to dive into that dip and more depth qualified education expenses paid on behalf of the student by someone other than the student such as a relative so some uncle the rich uncle paid for this the stuff they're treated as paid by the student so again it wouldn't really make sense like it doesn't really make sense if you had like a rich uncle that paid for the educational expenses of a student but then you don't get the benefit of taking the no one gets the benefit because the rich uncle doesn't claim the student as a dependent and the in the student if they're taking the deduction you would think they would get the benefit someone should get the benefit or otherwise the rich uncle would have to structure it as if they're gifting the money to the student and the student is paying for it right which is kind of a similar thing so any case qualified education expenses paid or treated as paid by a student who is claimed as a dependent on your tax return are treated as paid by you if you or the student takes a deduction for higher education expenses such as on schedule C form 1040 you cannot use those same expenses in your qualified education expenses when figuring your education credits so if you have a schedule C a business then you can't take the deduction on the schedule C and double dip in a sense basically getting tax favorable treatment by taking the same money elsewhere for a credit calculation caution any qualified expenses used to figure the education credit cannot be taken into account in determining the amount of distribution from a Coverdale ESA or qualified tuition program section 529 plan that is excluded from gross income so you can see publication 970 for that so if you're dealing with a Coverdale ESA then you can take a look at publication at 970 for for more detail on it so then we have the prepaid expenses what about these prepaid expenses again these are always coming into consideration qualified education expenses paid in 2021 for an academic period that begins in the first three months of 2022 can be used to figure an education credit for 2021 so again if it was the tuition then you would expect that the financial institution would kind of have that figured out because you will probably be paying for the first quarter or whatever they want to call it semester whatever of 2022 in December of 2021 so now the question is do you take that amount into consideration in 2021 or should it be applied to 2022 typically you would apply it to 2021 if paid in 2021 if it was for the actual tuition you would expect that that amount would be shown on on the documentation provided by the school hopefully but you might want to keep that cut off in mind for example if you pay 2000 in December 2021 for qualified tuition for the 2022 winter quarter that begins in January 2022 you can use that $2000 in figuring an education credit for 2021 only if you meet all the other requirements caution you cannot use any amount you paid in 2020 or 2022 to figure the qualified education expenses you use to you use to figure your 2021 credits so I think what they're trying to say there's obviously you can't use the same money that you paid in 2021 and 2022 so I couldn't say okay I paid in 2021 this amount for the first quarter of 2022 and I'm also going to take the that same money into consideration in 2022 right because you can only you can only take it you know one time on one tax year