 Income Tax 2022-2023, American Opportunity Credit Introduction. 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 it on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're down at the bottom where the credits are located. Remembering, the first half of the income tax formula is in essence an income statement, although a strange one ending at taxable income similar to net income, the bottom line of an income statement. Then we calculate the tax on the taxable income, not with one rate, not with a flat tax, but with a progressive tax system to get to the tax before credits and other taxes. Then we get to the credits and other taxes like self-employment tax and whatnot, and then we have the payments in the form of withholdings or estimated tax payments to get to the bottom line, tax refund or tax due. Credits are similar to deductions in that we like them both, but if we could get $1 of credit versus $1 deduction, we typically want the $1 credit because we get the full dollars worth generally as opposed to a deduction, simply decreasing taxable income, the benefit then being dependent upon the tax rate. Also remember when we think about these credits, we have to think about two major categories. Support a counting 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. Those being non-refundable and refundable, non-refundable credits do not take the tax liability below zero, so refundable credits do and when they do, that means that it's using the tax code more as a benefit or welfare program rather than a tax system at that point. All right, so we're looking at the education credits and we think about the two credits together. In some cases or in general, the American opportunity credit, the lifetime learning credit were focused now in specifically on the American opportunity credit, which is typically more difficult to qualify for but more beneficial. Therefore, we usually aim for that one first. If we can't get that one, then by default, we move to the lifetime learning credit. Okay, reminders, form 1098T requirement. So to be eligible to claim the American opportunity credit, the law requires a taxpayer or a dependent to have received form 1098T tuition statement from an eligible educational institution, whether domestic or foreign. So remember, my interpretation of this 1098T is not that you need the exact numbers to tie out to the 1098T, although that might often be the case because that's going to be the amount of the tuition. But remember that the government is also receiving that form 1098T and if you're taking some kind of credit related to expenses for higher education, they want to at least confirm that you were enrolled in an institution of higher education. So that is what the 1098T, you want to make sure that you have that, even if for whatever reason the amount that you're reporting as possible, a deductible amount or an amount that could be applied towards the credit is different for whatever reason that is on the form 1098T. However, you may claim the credit if the student doesn't receive a form 1098T because the student's educational institution is required to furnish a form 1098T to the student under existing rules. So normally you're going to get a 1098T. If you don't get a 1098T, then you probably want to contact the institution and if there's some weird reason that the institution doesn't need to issue you a 1098T, you might have an exception in that case. We talked about that in a prior presentation, so I won't go into it in too much more detail here. So you may also claim a credit if the student attended an eligible educational institution required to furnish form 1098T but the student doesn't receive form 1098T before you file your 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 following required steps. So if they just don't issue the 1098T, then you should be doing your due diligence trying to go to the financial institution and get them to issue the 1098T providing the information necessary to do that, which will typically be some contact information like your address and whatnot that they need to populate it. So introduction form for 2022. There are two tax credits available to help you offset the cost of higher education by reducing the amount of your income. They are the American Opportunity Credit, this chapter, and the Lifetime Learning Credit, which is going to be a future chapter in our publication. This chapter explains who can claim the American Opportunity Credit. So we think about these kind of together. So once again, we're going to talk about the American Opportunity Credit first because that's the one you'll typically go for if you can get it and then the Lifetime Learning Credit second. Okay, what expenses qualify for the credit? Who is an eligible student who can claim a dependent's expenses and how to figure the credit, how to claim the credit, and when the credit must be repaid. So what is the tax benefit of the American Opportunity Credit for 2022? You may be able to claim a credit up to $2,500 for adjusted qualified education expenses paid for each student who qualifies for the American Opportunity Credit. So a tax credit reduces the amount of income tax you may have to pay. So it's not a deduction, it's a credit. If you get $2,500 of credit, it's not just reducing your taxable income but you might get that full benefit of the $2,500 possibly. There could be AGI limitations and all that kind of stuff and is it refundable and we'll get into that shortly but the credits are typically better than the deductions. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. 40% of the American Opportunity Credit may be refundable. So that's the portion that possibly could go below zero resulting in a refund or tax benefit even though you have no tax, meaning it's the welfare or benefit portion of the tax even if you don't own any, even if you go and pass the tax liability below zero. This means that if the refundable portion of your credit is more than your tax, the exits will be refunded to you. Your allowable American Opportunity Credit may be limited by the amount of your income. Also, the non-refundable part of the credit may be limited by the amount of your tax. In other words, the American Opportunity Credit has a phase out. So if your income gets quite high, it could start to phase out because your income is high and if your income is low, then you may not owe any taxes and therefore it'll be limited because the non-refundable portion may go away, but the refundable portion you might still get benefit from. Alright, can you claim more than one education credit this year? For each student, you can elect for any year only one of the credits. For example, if you elect to claim the American Opportunity Credit for a dependent on your 2022 tax return, you can't use the same dependent's Qualified Education Expenses to figure the Lifetime Learning Credit. So you've got one student, let's imagine, that's going to school. You can't do both the American Opportunity Credit and the Lifetime Learning Credit for that student. You have to pick one or the other for that student tied to their Social Security Number in essence. If you pay Qualified Education Expenses for more than one student in the same year, you can choose to claim American Opportunity Credit on a per student basis, per year basis, which would kind of make sense, right? Because a second student, if they're still a dependent on your tax return, has different circumstances as to whether they would qualify for the American Opportunity Credit or the Lifetime Learning Credit. So you would think then the requirements would not be tied so much per return, although there could be a limit credit per return you could file, but you would think it would be tied to in essence the students' requirements per Social Security Number in essence of qualifying student. So if you pay Qualified Education Expenses for a student or students for whom you don't claim the American Opportunity Credit, you can use the adjusted Qualified Education Expenses of that student or those students in figuring your Lifetime Learning Credit. So this means that, for example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for another student in the same year. So this would be, you would think contradictory if you only had one student. You can't claim both the American Opportunity Credit and Lifetime Learning Credit, but if you had two qualifying students that are separate, then you could end up in a situation where you're claiming both the American Opportunity Credit and the Lifetime Learning Credit, one for each of the different students. So differences between the American Opportunity and Lifetime Learning Credits, there are several differences between these two credits. For example, you can claim the American Opportunity Credit based on the same student's expenses for no more than four tax years. So it's more restrictive in terms of how many years you can claim the American Opportunity Credit, the bigger credit, American Opportunity Credit. However, there is no limit on the number of years for which you can claim the Lifetime Learning Credit based on the same student's expenses. You can kind of hear that in the name back when they used to name credits or bills and whatnot that used to have something to do with what is in them. You could say, oh, the Lifetime Learning Credit, you can take it, basically keep on going for life. It doesn't have that same kind of limitation. So the differences between these credits are shown in the appendix near the end of this publication. So we took a look at a side by side in a prior presentation tip. If you claim the American Opportunity Credit for any student, you can choose between using that student's adjusted, qualified education expenses for the American Opportunity Credit or the Lifetime Learning Credit. If you have the choice, the American Opportunity Credit will always be greater than the Lifetime Learning Credit. All right, so we've got Form 8862 may be required if your American Opportunity Credit was denied or reduced for any reason other than a math or cleric or error for any tax year beginning after 2015, you must attach a completed Form 8862. So hopefully that's an unusual type of situation, but these kind of credits are areas where people will try to abuse the tax code and the IRS will then put, you know, further restrictions and requirements in that case in place. Caution, don't claim the American Opportunity Credit for two years after there was a final determination that your claim was due to reckless or intentional disregard of the rules or 10 years after there was a final determination that your claim was due to fraud. All right, so here's our table once again, overview of the American Opportunity Credit. This time we're just focused on the American Opportunity Credit and not doing that side-by-side table with the Lifetime Learning. So a quick recap, we'll go into some of these items then in more detail. The maximum credit, up to 2,500 credit per eligible student. The limit on modified adjusted gross income, $180,000 if married, finally jointly, $90,000 if single, head of household or qualifying surviving spouse. Number of years of post-secondary education, available only if the student had not completed the first four years of post-secondary education before 2022. Generally the freshmen through senior years determined by the eligible educational institution, not including academic credit awarded solely because of the student's performance on proficiency examinations. Number of tax years credit available, available only for four tax years per eligible student. Type of program required, student must be pursuing a program leading to a degree or other recognized educational credential. Number of courses, student must be enrolled in at least half time, so there's a significant requirement for at least one academic period that begins during 2022 or the first three months of 2023 if the qualifying expenses were paid in 2023. So we have that cut off kind of issue. Felony drug convictions. So they just kind of threw this one in there. As of the end of 2022, the student had not been convicted of a felony for possessing or distributing a controlled substance. Qualified expenses. They've got tuition required enrollment fees and course materials that the student needs for a course to study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance. So a bit more broad there in the definition than you might otherwise think. Payments for academic periods, payments made in 2022 for academic periods beginning in 2022 or beginning in three months of 2023. So we're usually on a cash-based system with taxes. So if we paid the tax, paid it in 2022, you would think we would get the deduction even though it doesn't happen. The courses don't start until 2023, although you can try to take advantage of that and the government's going to try to limit taking advantage of a cash-based system, for example, by trying to pay a lot more upfront to maximize the deduction in the current year, for example. TIN needed by filing due date, filers and students must have been issued a TIN by the due date of their 2022 return, including extension, educational institutions, EIN. You must provide the educational institutions employer identification number, the EIN, on form 8863.