 Income Tax 2022-2023. American Opportunity Credits. What Expenses Qualify? Let's do some wealth preservation with some tax preparation. Most of this information comes from Publication 970, Tax Benefits for Education Taxure 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the Income Tax 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. Formula we're down here at the bottom in the credit area. Remember in the first half of the Income Tax formula is in essence an income statement although it was strange one bottom line being taxable income similar to net income bottom line of a normal income statement. We calculate the tax on the taxable income not using one rate not a flat tax but with the progressive tax system to get to the tax before credits and other taxes and then we get to the credits and other taxes like self-employment tax and then we have the payments which would generally be in the form of estimated tax payments or withholdings to get to the bottom line tax refund or tax due. Also remember that the credits are similar to the deductions in that we like them both however if we could get a dollar credit versus a dollar deduction we would rather have the dollar credit because we typically get the full dollar of benefit whereas the dollar deduction simply deduces or reduces the taxable income by that dollar and the benefit we get will be dependent on our tax rate. Also remember that the credits are broken out between non-refundable and refundable credits the non-refundable credits do not take the tax liability below zero refundable credits or portion of a credit the refundable portion of the credit will take the tax liability below zero making the tax code for that amount more into a benefit or welfare program than a taxing type of system at that point. Okay what expenses qualify we're continuing on with the American Opportunity Credit. The American Opportunity Credit is based on adjusted qualified education expenses you pay for yourself your spouse or dependent you claim on your tax return. So someone goes to school possibly a college for example they're paying for that whoever is claiming that individual likely possibly might qualify for the American Opportunity Credit whether that be the individual themselves or their parents for example or spouse or something like that. Generally the credit is allowed for adjusted qualified education expenses paid in 2022 for an academic period beginning in 2022 or beginning in the first three months of 2023. So we have that cut off we basically are getting the expenses are going to accumulate towards possibly the credit on a cash basis system for the most part although we have that three month item here so that you don't overtake advantage of the of the cutoffs on the tax based or the cash based accounting system. Alright so for example if you paid $1,500 in December 2022 for qualified tuition for the spring 2023 semester beginning January 2023 you can use that $1,500 in figure in your 2022 credit. Academic period what does that mean? An academic period includes a semester, trimester, quarter or other period of study so usually they're pretty straightforward somewhat standardized although different institutions will have different periods so you have to kind of fit this whole thing into what the institution is doing but usually there'll be semester, trimester, quarter or something like that. They also could have a summer school session as reasonably determined by an education institution if an educational institution uses credit hours or clock hours and doesn't have academic terms each payment period can be treated as an academic period. Paid with borrowed funds what if you borrowed the money and paid for the tuition then you can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan that's kind of different than a grant or something like that if you got money that is going to be free money that you're just using to pay then it's not really an expense to you at that point in time right but if you took out a loan and this is kind of goes back to the whole I compare this to when people take out a loan on their home and often people say that hey look the bank owns 80% of my home but that's not really the case and usually that whole term came about as kind of hyperbole saying the bank actually owns my home but you know that's not the case because the bank cannot sit down at the kitchen table and tell you that you need to paint the bedroom blue because they own 80% of the home no it's only if you default that they have recourse possibly in that situation so it's the similar kind of thing here you would think if you took out a loan in order to pay for the school it's not like well the bank owns my education that's not really the case no you took out a loan in order to then pay that money and you've got to pay the money back to the bank so you would think it would still qualify as an expense because you paid for it you paid for it with borrowed money and you're going to have to pay back the borrowed money and plus the rent on the borrowed money called interest okay so use the expenses to figure the American Opportunity Credit for the year in which the expenses are paid not the year in which the loan is repaid treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account student withdrawals from classes so you can claim an American Opportunity Credit for qualified education expenses not refunded when a student withdrawals so you're like well what if I backed out what if I well you still paid it and they're not giving your money back so you might be able to still take the credit for the effort there and the money that you spent on the effort qualified education expenses for purposes of the American Opportunity Credit qualified education expenses are tuition and certain related expenses required to enroll or attendance at an eligible education institution so obviously the tuition is pretty straightforward here then it gets kind of messy when you get into certain related expenses could you be more specific could you be more specific on the on that part okay eligible education institution let's start there with that definition an eligible education institution is generally any accredited public non-profit or proprietary privately owned profit making college university vocational school or other post secondary educational institution also the institution must be eligible to participate in a student aid program administrative by the U.S. Department of Education so virtually all accredited post secondary institutions meet this definition so you would think that would generally be the case because education is so expensive these days at these post secondary institutions in part because they've kind of been subsidized in part through kind of the loan type of system so you would think for post secondary institution to survive they would have to be eligible to to take you know these these loans and what not so in any case an eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in the student aid program aid administered by the U.S. Department of Education all right related expenses let's get into those what are those obviously the tuition would count you would think what about the related expenses so student actively activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance so you kind of require to you locked into those ones however expenses for books supplies and equipment needed for a course of study are included in qualified education expenses whether or not here we go with the weather or not the materials are purchased from the educational institution so it's not just the government helping out the public school you know the schools over there you could get an expense even without paying the institution themselves here if it's for materials that are related to the course so once again however this is where the difference kind of lies here however expenses for books supplies and equipment needed for a course of study it's still a little bit vague there what does it exactly mean to be needed you know I needed a jacuzzi so that I can relax so that I can be at my best at my best right I don't think the jacuzzi but you know what I mean still a little vague there a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution okay prepaid expenses so here we get note we're on a cash based system for the most part meaning you would count the expense you would think when you pay it so if you paid it in 2022 that's when you would count it but you can imagine people trying to take advantage of that kind of system so that they try to mess with the cutoffs by paying for more stuff prepaying for stuff that's going to be further out into the future so qualified education expenses paid in 2022 for an academic period that begins in the first three months of 2023 so there's your cut now you've got this extended cutoff three months so you can't be like paying for stuff this year for like four years out into the future or a year out you only got that three months of 2023 can be used to figure an education credit for 2022 only see academic period earlier for example if you pay $2,000 in December 2022 for qualified tuition for the winter quarter that begins in January 2023 you can use that $2,000 in figuring and education credit for 2022 only if you meet all the other requirements I feel like they're kind of pounding that point home because it is a bit of a confusing one but we've seen some examples let's look at an example see if we can pound at home a little bit further here Jefferson is a sophomore in university V's degree program in the street oh I could probably use one of them but they're scary people sometimes those drills those drill anyways got the chills now I'm going to calm down relax this year in addition to tuition there's a requirement to pay a fee to the university for the rental of dental equipment used in this program so because the equipment rented is needed for this course of study Jefferson's equipment rental fee is a qualified chance well I should hope so that sounds like some expensive rental equipment for that kind of stuff example to grace and William both first year students at college W are required to have certain books and other reading materials to use in their mandatory first year classes right class fear class mystery class so they got the tuition now they're told you have to go buy these books what I need books as well in here alright the college has no policy about how students should obtain these materials but any student who purchased them from college W's bookstore will receive a bill directly from the college William bought the books from a friend grace bought the books at college W's bookstore both I bet the bookstore totally over over charged on those I bet because that's kind of what they do over there I feel like it's kind of scam but any case you might be able to find some used books I think this anyway so both qualified education expenses for the American opportunity credit so both are qualified both are qualified example number three when Kelly enrolled at college X for the freshman for the freshman year the school required payment of a separate student activity fee in addition to the tuition you're like I already signed up and now they want this other fee of course it's like tacking on you know you buy one thing and then they're like whoa you want this add on feature whatever you know to tell me about that before I purchased the first one in the first place trying to think car salesman alright this activity fee is required all students and is used solely to fund on campus organizations and activities run by students such as student newspapers and the student government whatever the portion of the fee covers personal expenses so no portion of the fee covers personal expenses although I labeled a student activity fee the fee is required for Kelly's enrollment and attendance at college X and is qualified expense you would think therefore so no double benefit allows you can't be doing the double dip in type of thing you can't do any of the following these are restricted things from you to do you can't deduct higher education expenses on your income tax return as for example a business expense and also claim the American opportunity credit based on these same expenses so you might be doing the higher education thing and you're trying to say well I'm going to deduct that on my schedule C because it's going to be looking good for my schedule C although you got to be careful there to see whether or not it's something that's going to be a relevant expense for your schedule C or is it something that's going to be separate from your business but if you could do that you could say I'm going to deduct it there well then you can't really double dip and then also take those same expenses and get a credit for it as well that would be you know taking the same you know getting two benefits from the same thing which would be better most possibly the credit oftentimes because you get that dollar for dollar benefit as opposed to if you could get a deduction somewhere else but sometimes there's going to be phase outs for income levels and that kind of stuff so you can test both of them out. Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit so you can't do that you can't use you can't claim both credits with the same expenses the American opportunity and lifetime learning you got to do one or the other. Figure the tax-free portion of a distribution from a Coverdale Education Savings Account an ESA Qualified Tuition Program QTP using the same expenses you used to figure the American opportunity credits for that one you could see the coordination with the American opportunity and lifetime learning credits in Chapter 6 and the coordination with the American opportunity and lifetime credits Chapter 7 so claim a credit based on qualified education expenses paid with tax-free education existence such as scholarships grant assistance provided by an employer so in these cases this is different than getting a loan if you got a loan you're going to have to pay back the loan unless you got it from the government they're going to wave it at some point which they keep bribing people with and whatnot but if you got a scholarship you don't have to pay back the money for sure so in that case you would think that you wouldn't get the expenses because you got free money that you're not going to have to pay back and then you paid for education expenses or they were paid directly for the education expenses there if your employer provided you money to pay for education expenses they're probably doing so because that money then is not going to be included in box one of your W-2 therefore not subject to federal income taxes and therefore you already got in essence a deduction because it wasn't included in income so you would think that if you use that money you'd be double dipping once again so see adjustments to qualified education expenses next so adjustments to qualified education expenses for each student reduced the qualified education expenses paid by or on behalf of that student under the following rules the result is the amount of adjusted qualified education expenses for each student tax free educational assistance alright so for tax free educational assistance received in 2022 reduced the qualified educational expenses for each academic period by the amount of tax free educational assistance allocable to that academic period so you've got these tuition but you got this tax free stuff already so you already got a tax benefit from it so you got it then reduced so some tax free educational assistance received after 2022 may be treated as a refund of qualified education expenses paid in 2022 that tax free educational assistance is any tax free educational assistance received by you or anyone else after 2022 for qualified education expenses paid on behalf of a student in 2022 or attributable to enrollment at an eligible educational institution during 2022 if the tax free educational assistance is received after 2022 but before you file your 2022 tax return see refunds received after 2022 but before your income tax return is filed later if the tax free educational assistance is received after 2022 and after you file your 2022 income tax return see refunds received after 2022 and after your income tax return is filed later so tax free educational institutions include. Who are these tax-free educational institutions and where can I get some of this tax-free stuff and so that I then have the problem of having to deal with this with relation to my credit. So you got the tax-free parts of scholarships, fellowship grants. So see tax-free scholarships and fellowship grants in chapter one. So you got free money. If the money is free, if you got free money, then you already got a benefit because you got money for free. That was paid to the school. So it's not really an expense to you in that case. The tax-free part of the Pell Grant. See Pell grants in other title four need based education grants in chapter one. You got the employer provided educational assistance. So your employer is giving you money, which again, the reason they would do that is because it goes a little bit further because it would be possibly tax-free, not subject to federal income tax, which is good for both the employee and employer. So you got the veterans educational assistance. See veterans benefit in chapter one. And you've got any other non-taxable tax-free payment other than gifts or inheritance received as educational assistance. Generally, any scholarship or fellowship grant is treated as tax-free. However, a scholarship or fellowship grant isn't treated as tax-free if to the extent the student includes it in gross income. The student may or may not be required to file a tax return for the year the scholarship or fellowship grant is received and either of the following is true. The scholarship or fellowship grant or any part of it must be applied by its item to expenses such as room and board other than qualified education expenses. As defined in qualified education expenses in chapter one, the scholarship or fellowship grant or any part of it may be applied by its terms to expenses such as room and board other than qualified education expenses as defined in qualified education expenses in chapter one. So you've got this broader definition in some cases possibly of what it can be used for as opposed to what we talked about. Notice we didn't talk about room and board as in our case for expenses that can be used for the credit. Alright refunds. A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or required repayment or recapture of a credit claimed in an earlier year. Some tax-free educational assistance received after 2022 may be treated as a refund see tax-free educational assistance earlier refunds received in 2022. For each student figure the adjusted qualified education expenses for 2022 by adding all the qualified education expenses for 2022 and subtracting any refunds because obviously if you got a refund then you got the money back of these expenses received from the eligible educational institution during 2022. So for example if you enrolled in a class and then you unenrolled in the class before the cutoff date or whatever and they refunded the money to you, clearly you didn't pay the money in that case and so you'd have to take out the amount that was refunded. Take that into consideration. So refunds received after 2022 but before your income tax return is filed. If anyone receives a refund after 2022 of qualified education expenses paid on behalf of a student in 2022 and the refund is paid before you file an income tax return for 2022, the amount of qualified education expenses for 2022 is reduced. So in other words, let's say you took classes in 2022 but then you dropped out in 2022 before the cutoff date and they're going to give you a refund but they don't give you a refund until next year 2023. But you still haven't filed your tax return in 2023 because you don't have to file to like April whatever of 2023. So the fact that you got the refund in time before you filed the tax return means that you would think you could take that into consideration when counting the expenses, reducing the expenses by the amount that you got refunded in 2023 because you got the refund before you filed the tax return. So refunds received after 2022 and after your income tax return. So now it's like well what if I dropped out in 2022 of some course or whatever and they refunded it in 2023 but I already filed the tax return so I can't reduce 2022 expenses because I already filed unless I have to amend the tax return to do that now. So if anyone received a refund after 2022 of qualified education expenses paid on behalf of a student in 2022 and the refund is paid after you file an income tax return for 2022, you may need to repay some or all of the credit. So that's not good. So see the credit recapture. So we have the recapture credit rules in that case. Credit recapture. So if any tax free educational assistance for the qualified education expenses paid in 2022 or any refund of your qualified education expenses paid in 2022 is received after you file your 2022 return. You must recapture or repay because now you got a benefit. You got a benefit from stuff that you got refunded to you. So you have to and so you got to recapture that part because it cheated or you didn't really cheat. You didn't know but now you know and now you got to fix it. So you do this by figuring the amount of your adjusted qualified education expenses for 2022 by reducing the expenses by the amount of the refund or tax free educational assistance. You then figure your education credits for 2022 and figure the amount by which your 2022 tax liability would have increased if you claim the refunds credit. So in essence, it's kind of like an amended return kind of situation here. You're saying okay it's 2023 now but I can try to figure out the recapture of the credit. How would I do that? Well I can run the tax return having had the full amount that I put in before and then run the tax return having removed the amount that was refunded in 2023 after having filed the return and to see what the difference is in terms of the tax difference. So include this amount as an additional tax for the year the refund or tax free assistance was received. Alright so example that would be helpful. This is a little confusing. So you paid $7,000 tuition and fees in August 2022 and your child began college in September 2022. You filed your 2022 tax return on February 17th, 2023 and claimed an American opportunity credit of $2,500 after you filed your return and you received a refund of $4,000. You must figure your 2022 American opportunity credit using $3,000 of the qualified education expenses instead of $7,000. The figured credit is $2,250. The increase to your tax liability is $250. So we basically did the calculation both ways and we can see the difference is the $250. Okay, include the difference of $250 as additional tax on your 2023 tax return. So you had to recalculate your 2022 taxes which is kind of a pain but if you have the tax software you can kind of do that and figure out what the difference is. If you took into account the fact that you got this refund in 2023 and then include the difference in this case $250 of additional tax on your 2023 tax return. See the instructions for your 2023 income tax return to determine where to include this tax. All right, tip. If you pay qualified education expenses in both 2022 and 2023 for an academic period that begins in the first three months of 2023 and you receive tax-free educational assistance or a refund as described above, you may choose to reduce your qualified education expenses for 2023 instead of receiving your expenses for 2022 instead of reducing. So you might, for example, be saying, okay, well, look, if I got a refund for tax year 2022 but I already filed 2022 and now it's 2023, do I really have to go back and fix 2022? What if in 2023 I am also claiming the American Opportunity Credit because I can claim it for four years? Why can't I just, could it be possible that I just adjust the expenses in the current year for the fact that I had the refund that happened in 2023? Possibly that would be a solution but it wouldn't be one that could be applicable to all scenarios because it could be quite possible that you have the educational expenses in 2022 and you don't have them at all in 2023, in which case you would have to then default to running this scenario to figure out what the difference is and so on. Amounts that don't reduce qualified education expenses, don't reduce qualified education expenses by amount paid with funds the students receives as payments for services such as wages. So if you got payments for wages, for example, then it's not like free money, you earn the money and possibly have to report taxes or pay taxes on the wages. A loan, a loan situation isn't the same as a scholarship type of situation because you're going to have to pay back the loan with rent on the money interest typically and therefore you would think you wouldn't have to reduce the expenses by the amount you got for a loan. A gift is kind of similar you might think to a scholarship type of situation that you were gifted money but it's not from like a scholarship that's usually going to be a gift from like a family member or something like that, which is usually not a taxable item such as money from something outside of a gift type of situation is generally often subject to tax unless it's exempt from tax. Inheritance is a similar situation. You might have got free money from an inheritance, but when someone dies, they might have an estate tax that would be subject at the point in time of death to the assets that they have there. So you would think that the inheritance that you receive generally is not is not subject to tax at that at the point in time that you, you know, receive it. So you should be able to do what you want with the inheritance. You would think a withdrawal from the students personal savings. So if you have money in your personal savings account, you wouldn't generally need to reduce the expenses from there because it got in your personal savings account presumably from work that was done or from an inheritance or from from a gift or something like that. So that wouldn't be something that you would think you would reduce the expenses by. Okay, I don't reduce the qualified education expenses by any scholarship or fellowship grant reported as income on the students tax return in the following situations. Now normally if you get this free money from from like a grant or scholarship or something like that, oftentimes it's not subject to income. So the fact that it's not subject to income tax means that you already got like a tax benefit. So you got something and when you receive something, it's going to be subject to income. Usually is the IRS's general rule unless they exempt it. If they exempt it, then you kind of already got a deduction. And if you also take that money into account for doing the credit, then you would be kind of double dipping is the idea in that type of situation. But if you had to include the money as income, then you would think you may be able to get the expenses you paid with that money to be included in the credit. So once again, don't reduce the qualified education expenses by any scholarship or fellowship grant reported as income on the students tax return in the following situations. So the use of the money is restricted by the terms of the scholarship or fellowship grant to costs of attendance, such as room and board other than qualified education expenses as defined in qualified education expenses in chapter one. The use of the money isn't restricted. Okay, example, Joan paid $3,000 for tuition and $5,000 for room and board at University X. The University did not require payment of any fees in addition to the tuition in order to enroll in or attend classes. To help pay these costs, Joan was awarded a $2,000 scholarship and a $4,000 student loan. The terms of the scholarship state that it can be used to pay any of Joan's college expenses. I drifted from university to university. X applies the $2,000 scholarship against Joan's $8,000 total bill and Joan pays the $6,000 balance of her bill from University X with a combination of the student loan and personal savings. Joan doesn't report any portion of the scholarship as income in the tax return. So now she got that free income or the free money that isn't subject to the taxes because it's not being included in income taxes for the scholarship amount, the loan amount she's going to have to repay. Okay, so in figuring the amount of either education credit, American opportunity or lifetime learning, Joan must reduce the qualified education expenses by the amount of the scholarship, the $2,000 because it wasn't, you already got a tax benefit from it by not being included in income because the entire scholarship was excluded from reported in income and Joan's tax return. The student loan isn't tax free educational assistance, so the qualified expenses don't need to be reduced by any part of the loan proceeds. You might be saying, well, the loan wasn't included in income either. It wasn't. Of course, it's not an income because it's not income because you're going to have to repay the loan plus interest. So that's why it's not. So Joan is treated as having paid $1,000 in qualified education expenses, $3,000 tuition minus the $2,000 scholarship. Okay, example two, the facts are the same as an example one, except that Joan reports the entire scholarship as income on the tax return. So now she didn't get that tax exempt status. She got that money. It's free money, but subject to taxes. So she already got hit with the taxes because Joan reports the entire 2000 scholarship as income. The qualified education expenses don't need to be reduced. Joan is treated as having paid $3,000 in qualified education expenses. All right, we got the coordination with the Pell grants and other scholarships. So you may be able to increase your American opportunity credit when the student, you, your spouse, your dependent includes certain scholarships or fellowship grants in the student's gross income. Your credit may increase only if the amount of the student's qualified education expenses minus the total amount of scholarship and fellowship grants is less than $4,000. If this situation applies, consider including some or all of the scholarship or fellowship grants and the student's income in order to treat the included amount as paying non qualified expenses instead of qualified education expenses. So note, when you looked at that last example, you might be thinking, well, hey, wait a second. If I got them, if I had a choice, if I've got this money and and I can include it in income, if I included an income, that's usually bad. But, but it's only, it's only if I get, if I don't include it in income, it's only a deduction as opposed to the credit situation. And with the credit would be better than the deduction. If I get a dollar for dollar credit versus the deduction, which is going to be reducing the taxable income. So you would imagine in some cases you might be saying, well, hey, wait, I would rather include it in income if I have an option to in some cases because the credit might outweigh the amount of benefit you can get from the deduction, which they were trying to give a tax benefit from by not having to include it in income. But the credit kind of confuses the whole situation sometimes. So non qualified expenses are expenses such as room and board that aren't qualified expenses such as tuition and related fees. So scholarships and fellowship grants are grants that the student includes in income. Don't reduce the students qualified education expenses available to figure your American opportunity credit. Including enough scholarship or fellowship grant in the student's income to report up to $4,000 in qualified education expenses for the American opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe, even considering any increased liability from the additional income. So you're going to get a bigger benefit from the credit than you would from not including it in income, which is equivalent to like a deduction. Credit's being better than deductions, although there's limits to it because there's limit on how much you can claim on the credit and so on. However, the increase in the tax liability as well as the loss of other tax credits may be greater than the additional American opportunity credit and may cause your tax refund to decrease or the amount of tax you owe to increase. So there's other factors that could be involved because now you're adjusting the adjusted gross income, the AGI. And that means that other tax things that are related on the phase out of your AGI will be negatively affected if you have a higher AGI oftentimes. So your specific circumstances will determine what amount, if any, I'm losing my voice. Hold on, I need some coffee. I'm back. This is a long one. Your qualified circumstances will determine what amount, if any, of qualified or fellowship grant to include in income to maximize your tax refund or minimize the amount of your tax owed. So the scholarship or fellowship grant must be one that may qualify a tax free scholarship under the rules discussed in chapter one. Also the scholarship or fellowship grant must be one that may be, by its terms, be used for non qualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to non qualified, qualified expenses can't exceed the amount of the students actual non qualified expenses that are paid in the tax year. This amount may differ from students living expenses estimated by the students school and figuring the official cost of attendance under student aid rules. The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses such as tuition and related fees doesn't prevent the student from choosing to apply certain scholarship or fellowship grants to the students actual non qualified expenses. By making this choice, that is, by including the part of the scholarship or fellowship grant applied to the students non qualified expenses in income, the student may increase taxable income and may be required to file a tax return. But this allows the payment made in cash by check by credit card with borrowed funds such as a student loan to be applied to qualified education expenses. Alright, example, no scholarship. So Bill, age 28, unmarried, enrolled full time in 2022 as a first year student at a local college to earn a degree in law enforcement. This was Bill's first year, tough career these days. This was Bill's first year of post-secondary education. During 2022, Bill paid $5,600 for qualified education expenses of $4,400 for room and board for the fall 2022 semester. Bill and the college met all the requirements for the American Opportunity Credit. Bill's adjusted gross income, AGI and MAGI, modified adjusted gross income for purposes of figuring this credit are $36,450. Bill claimed the standard deduction $12,950 resulting in taxable income of $23,500 and an income tax liability before credits of $2,618. So that's the tax liability before we get to the credits. Bill claims no credits other than the American Opportunity Credit. So we're not going to muddy up the field with child tax credits and earned income credits and whatnot. Bill figures his American Opportunity Credit based on qualified education expenses of $4,000 which results in a credit of $2,500 and a tax liability after credit of $118. Let's do another one. Number two, scholarship included from, excluded from income. So you got some free money, not included for income. So the facts are the same as example one, no scholarship except that Bill was awarded $5,600 scholarship. So you got a scholarship this time. Under the terms of the scholarship, it may be used to pay any educational expenses including room and board. If Bill excludes the scholarship from income, it will be deemed for purposes of figuring the education credit to have been applied to pay tuition, required fees and course material. Bill's adjusted qualified education expenses would be zero and there would be no education credit. Therefore, Bill's tax liability after credits would be $2,618. So now he got that free money and basically it wasn't included in income. So he would have to reduce his expenses by that amount wiping out the amount that he would be able to include in the credit, not taking the credit. In that case, you might be saying, hey, look, wouldn't it be better for Bill to include it in income if he could, if he had the choice so that he can get the credit, because the credit might be worth more than not including it in income, which would be similar to a deduction. So example three, scholarship partially included in income. So the facts are the same as example two, scholarship excluded from income. If unlike example two, Bill includes 4,000 of the scholarship in income, the 4,000 will be deemed to have been applied to pay for room and board. The remaining 1,600 of the 5,600 scholarship would reduce the qualified education expenses and the adjusted qualified education expenses would be $4,000. Bill's AGI and modified AGI, adjusted gross income, would increase to $40,450. The taxable income would increase to $27,500 because now he included more income from part of the scholarship. And the tax liability before credit would be $3,998. Based on the adjusted qualified education expenses of $4,000, Bill would be able to claim an American Opportunity Credit of $2,500. Boom! And the tax liability after the credits would be $5,998. Okay, example four, scholarship applied by the post-secondary school to tuition. So the facts are the same as in example three, scholarship partially included in income, except the 5,600 scholarship is paid directly to the local college. The fact that the local college applies the scholarship to Bill's tuition and related fees doesn't prevent Bill from including 4,000 of the scholarship in income. As in example three, by doing so Bill would be deemed to have applied 4,000 to pay for room and board. Bill would be able to claim the American Opportunity Credit of $2,500 and the tax liability after credit would be $5,98. Whoo! Expenses that don't qualify. What doesn't qualify then? Qualified education expenses don't include amounts paid for insurance, medical expenses, including student health. But I know it's a stressful situation, but you don't get to deduct your health benefits or any coffee or anything. Room and board. So it doesn't include the room and board. Transportation or similar personal living or family expenses. This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Sports, games, hobbies and non-credit courses. Qualified education expenses generally don't include expenses that relate to any course of instruction or other education that involves sports, games or hobbies or any non- This isn't for recreation here people. This isn't recreation. You can deduct your bowling class. However, if the course of instruction or other education is part of a student's degree program, these expenses can qualify. Ha! The bowling class was part of my counting towards my degree program. Comprehensive or bundle fees. Some eligible educational institutions combine all of their fees for the academic period into one amount If you don't receive or don't have access to the allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses such as those listed earlier, contact the institution. So you might say, hey look I paid a bundle and some of it included some of the stuff like room and board and whatnot. So you're going to contact the institution and say, hey look I need to break this stuff out. Institutions should know this because you would think they'd get that question a lot if they don't properly break up bundles so that people can calculate the education expenses. The institution is generally required to make this allocation and provide you with the amount you paid for qualified education expenses on form 1098T See figure in the credit later for more information about form 1098T.