 Income Tax 2021-2022 Software Example American Opportunity Credit. Get ready to get refunds to the max, diving into Income Tax 2021-2022. We'll assert tax software. You don't need tax software to follow along, but you might want to have access to the forms and schedules. You can find on the IRS website, irs.gov, irs.gov. We're going to start out with the filing status at single, noting that we're focusing in on the credit, and the major differences for the filing statuses on the credit will be either married or non-married. If non-married, you might be single or head of household, which will be dependent in part on how many dependents you have. But really, we're really kind of focused on single versus married, because that could have some implications with the focus that we're looking at here, which is the American Opportunity Credit in particular for the education credit. So we have Adam Smith, out living in Beverly Hills, 90210. We're going to start off with zero dependents, and we've got wages at the 50,000 W2 wages. The 12,550 for the standard deduction gives us to the 37,450 for the taxable income. Then we're going to go then to page two, the tax at the 4298. We could mirror that over here on our income tax equation, 50,012,550. There's the 37,450. We're going to get the tax from the software at the 4298. So that's going to be 4298, 4298. And then if I scroll down, we're focusing in here on the education credits, which is going to be the American Opportunity Credit down below. And you might also have a non-refundable component of it that would be reported up top in line 20 that would be flowing in from the schedule three. So we'll take a look at that. So I'm going to open up the form now that's typically going to be used. That's going to be the form 8863. And here it is. And we're looking at the education credits, the American Opportunity and Lifetime Learning Credits. These are two different credits, but we kind of put them on, or they do put them on the same form, because we typically would get a better benefit from an American Opportunity Credit if applicable, but the restrictions are more stringent. So we might not be able to get access to it. Therefore, we would then go to the Lifetime Learning Credit. So we've got basically up top in part one. This is the refundable component. When you're talking about a refundable component, you're only talking about the American Opportunity Credit because it has a refundable component to it, whereas the Lifetime Learning Credit does not. So if you do not qualify for the American Opportunity Credit, you wouldn't be basically using the part one. Part one is going to be that refundable component. The refundable component meaning that it could take your refund or the credit could take your liability basically below zero, resulting in possibly a refund that's not really a refund, but more of like a benefit program in that instance. Then we have part two, which is the non-refundable education credits. Now part two, it gets a little confusing because you could have some mix between the two types of credits. It's possible that you have the American Opportunity Credit and someone else taking like the Lifetime Learning Credit. The American Opportunity Credit up top has a refundable and non-refundable component to it, whereas the Lifetime Learning Credit would be all down here and the non-refundable section. And then if I go to page two, which we actually kind of think of doing first because page two will be actually listing out the student, which is going to be typically someone that's on our tax return, either us or if we were married, our spouse, or if we have say a dependent on the tax return and giving the qualifications as to whether they're going to qualify for the American Opportunity or Lifetime Learning and then give us the amounts. For each of them, we would have multiple page twos if we had multiple people that would be qualified for some type of education credit. The totals then here are actually flowing back into page one for our calculations on page one. So let's start out with the easiest kind of scenario where we've got Adam and he's going to be claiming his own education expenses. So he's got the expenditures, which typically would be reported at least in part on the form 1098T that we would get from the financial institution. Now note that this will include, at least you would think that tuition's pretty accurately and hopefully all the cutoff dates and whatnot that we talked about in prior presentations would be done properly here for reporting in the current year. But you might want to ask about that for your financial institutions and then you might have some other things like books and supplies and stuff that may or may not be on the 1098T depending on your particular circumstances. So you've got to dive into that. So in other words, the fact that you get a 1098T will typically be an indication and will usually be there to indicate that you would possibly qualify for the credit, but it might not have all the information that you need in order to do the credit, including you might have other kind of expenses, for example. So we'll take this and we're going to say, okay, let's bring this on over and put that into our tax return. So I'm going to say, okay, let's go to the credits here and we're going to say it's for the taxpayer and it's going to be the American Opportunity Credit. You've got some questionnaires down here. Student was not enrolled at least half-time, so that's going to be one of the requirements for the American Opportunity. Student completed first four years of post-secondary, so if they did, they couldn't claim that the American Opportunity would go to the Lifetime Learning. Student was convicted before of a felony, so that would eliminate the American Opportunity for the Lifetime Learning. So then we have the information for the college, which I'm going to call Cool U. So Adam went to Cool U and it's located here, which isn't a real place. And then you would of course need the federal ID number from the institution, which would be on that 1098T information. And then we've got the current year expenses. So I'm going to pull this amount from the 1098T and then you could have other stuff that you might be asking for, books and supplies required to purchase from the institution or books and supplies not entered above. So I'm going to say, okay, let's put a large amount and then we'll see that it'll cap it off on the software so we can kind of see what the cap is. So then I could pull back on over and say now we're on the 8863, where we've got the 2500 pulling over in part one because we're qualifying for the American Opportunity credit. So if I go to page two, this is where you actually see the information. This is kind of, you almost think about this done first. This is Adam Smith. Adam Smith is the student. The student social security numbers pulling forward from the first page of the tax return, which is actually the taxpayer for us. It's not a dependent in this case. It's the actual taxpayer. And so if I go back down here, then I went to the wrong. So we can see that Adam went to cool you and then if we had a second institution, we could put the second institution here for that individual, the address, the second address if you had one. Did the student receive the form 1098T from this institution? We're going to say yes. Did the student receive form 1098T from this institution for 2020 with box seven checked? I'm going to say no. Number four, enter the institution's employer identification number. So there is that coming from the 1098T. And then 23 has the Hope Scholarship credit or American Opportunity credit been claimed for the student for four tax years before. Now it used to be called this credit the better one or the bigger one in terms of benefits is now called American Opportunity credit. It used to be called the Hope Scholarship has the Hope Scholarship credit been used. So you got to kind of keep that in mind. If it had, then you'd have to stop here because you had taken it for four years that you no longer qualify it. Therefore you would be defaulted to the lifetime learning. So we're going to say no. 24 was the student enrolled at least half time for at least one academic period that began or is treated as having begun in 2021 as at an eligible educational institution in a program leading towards a post-secondary degree certificate or other recognized post-secondary education credential. We're going to say yes. Number 25, did the student complete the first four years of post-secondary education? So we're going to say no. And that would be depended on the institution generally and what it is for the credentials of the first four post-secondary number 26 was the student convicted before the end of 2021 of a felony or possession of distribution of control so we're going to say no. So that means they qualify for the American opportunity credit based on that information. The adjusted qualified education expenses are not going to exceed the 4,000 because that's the maximum even though we put 20,000 in the software. So we subtract the 2,000 from the 27,000 and we get the 2,000 and then we're going to multiply line 28 by 25 so there's the five. So you get the full 100% of the first 2,000 and 50% of the second 2,000 or 25% I believe was the calculation is how you get to the 2,500 which is the maximum of the credit or the maximum amount and then that pulls over to page one so there's the 2,500 and then we've got our kind of adjustment for the refundable portion and the non-refundable portion. So up top on the refundable portion the 2,500 pulls over enter 180 if married, filing jointly 90 if single these are the phase outs or the income limitations. So we'll talk about that in a second enter the amount from form 1040 line 11 this is your income from 1040 if I go to line 11 that's your AGI so it would be the modified AGI if there's any adjustments to it it's actually line 11 here and that rolls in that rolls in and then subtract line three from two if zero less stop you can't take any deduction because that's the income phase out so enter 20,000 if married 10,000 if single head of household so then if line four is equal to or more than line five enter one so that means we're going to enter the one because we're not going to phase it out it's not going to be lowered then we've got multiplied line by six there's the 2,500 refundable American opportunity credit multiply line seven by 40% so only 1,000 of the amount is refundable then we go to the non-refundable component this is still the same credit this is not the lifetime learning component this is the non-refundable portion of the American opportunity it says subtract line eight from line seven we get the 1,500 and in essence that's going to be the non-refundable credit so these two then pull forward if I look at the schedule three then we've got the education credit right here on line three that's the 1,500 that's the non-refundable portion that pulls into the form 1040 page two so there it is there's the non-refundable portion the 1,500 and then down below we have the refundable portion of the 1,000 and so we've got the refund here now the way to see this non-refundable kind of how that works let's bring the income down let's say my income was at like 20,000 and then we'll see that non-refundable portion gets capped but the refundable portion does not down here so we still have the refundable portion that's the point of the refundable portion the liability went below zero you still get the benefit of the refundable portion which is kind of like a benefit program at that point you can see that reflected on the form here and that you're still picking up that 1,000 but this one down here got capped now at the 748 which is basically capping at the liability that was imposed now we also have the phase outs so if I scroll back up top and I say okay we're talking about a single filer if they had something over like 90,000 we're at 20,000 here or let's change it to like 85,000 so now we've got the 85,000 pulling over from 1040, 85,000 the AGI 85,000 pulling that on over to the 8863 and now you can see that here we're doing basically a phase out so now we've got a lesser amount of the refundable portion due to that and we've reduced it due to the phase out limitation so that would then pull over to the 1040 so now we have the 750 up top and the 500 down below so there's going to be a phase out that's going to take place let's bring it back on down to let's say 50,000 so we're back maximizing it out again so now let's add some more people and say that they also qualify for the American Opportunity Credit so I'm going to go back on over and let's say okay well what if we had like another dependent what if we had another dependent so I'm going to add Sam as a dependent now so now it's going to say I'm going to say this is from a dependent Sam and Sam also qualifies for the American Opportunity I probably got the wrong he's probably too young for my date range but Sam went to cool you too we're going to say and so now we've got two people that qualify for the American Opportunity Credit here qualify tuition let's just max it out again 20,000 here again and it'll show us the cap that we will see so let's go back on over so if we go to the 1040 we've got Adam now and now we've got Sam as a dependent now notice I'm not going to be toggling I'm not really focusing on going from single to head of household per se because really we're looking at the credit here and the difference on the credit will generally be if married or non married so I'm going to keep it single for consistency here and then we'll go to married later the thing I want to focus in on is that now we have Adam here and then we've got the Sam Smith and because Sam Smith is a dependent on Adam's return you would think that if there was any benefit for the education expenses it would be on the return for Adam Smith now note because we're talking about college here we could have a situation where Sam would still be a dependent on the tax return of say a parent or possibly have the ability to do so or they might be independent at that point in time and then filing basically their own taxes so you got that kind of complexity at that point in time that stage in people's lives where you got the person that could still be a dependent there could still be claimed or may not be claimed and you got to determine that but if they're on as a dependent then you would think that any any benefits you would have for the education expenses would be for the parent's return here so then we're going to go on to the schedule and or the form 8863 and it's kind of unusual that they're both kind of going to school the same schools here the parent and the kid at this point but the point is we've got two people that's what we're looking at okay so we've got the education expense now up top in part one because we've said they both qualify for the American Opportunity Credit we're up at the 5000 in part one if we look at the page twos where that flows through we've got two page twos now we've got one for Adam and one for Sam right so now we've got Adam we saw last time going to cool you and they qualified for the American Opportunity Credit and then Sam also going to cool you the father and son are going to the same school it's like that one movie Summer School or Summer with Roger Dangerfield any case just get back any case here we go we got this one it's got the 4000 too so we capped it up at the 4000 still qualified for the 2500 that then pulls in the sum of those two sheets 2005 plus 2005 is now 5000 90,000 there's the cap there's our income levels at 50 so we've got the 40 here and so the full amount is deductible now we have 2000 1000 to 1000 that is now the refundable component the non-refundable component then being calculated at the 3000 if we look at that it's going to flow through to the schedule 3 so there is that that's going to be the non-refundable portion at least and then on the form 1040 we then have the non-refundable component up top and we've got the amount that is the refundable component down below and the non-refundable looks like it's being restricted here oh no it isn't there it is so the amount from schedule 3 there it is and we also have the thing that's throwing me off is we also have this non-refundable child or other dependent credit here of the 500 but that's not where our focus is we're focusing here okay so there is that one now this one this American opportunity credit you could have multiple people qualifying for it so you could keep on going I could say well what if I had more people like everyone in my family went to school like together at the same time we all just invaded the school so we'll add another one let's add another one and say now we've got Jane Jane also went there who's a dependent and Jane is also at Cool U and so and she had tuition of $20,000 too we're spending a fortune we're spending a fortune on these people this better pay off and then T. Smith we just stopped naming our kids at some point we just give them a letter we just go right through the alphabet and so this is going to be then 20 so now we've got four people going to Cool U if we go back on over to the forums and I go down and say and say let's take a look at it education credits and now on page two we've got Adam going to Cool U 2005 we got another page two for Sam at the 2005 we got another one for Jane at the 2005 and another one for T at the 2005 and if we add those up the 250 2500 2500 let's say that's my I can't calculate anymore with like my head 2000 times four that's what machines are for that's 10,000 that pulled over to page one here and then we've got the 4,000 which is the 1,000 times four that we saw before and then we've got the non-refundable component down below that pulling into the schedule three pulling into form 1040 page number two where we have these items pulling in here and there so you got multiple people that can be in place let's add one more let's say they're married here I'm not going to add another I'll just say now if they were married let's say they were married and there we have it and if I go back on over and say now they're married and I go to my form down here we've got the same we've got the calculations but we may have a different income threshold cap so it starts to phase out this one starts to phase out then at you know around the 180 if you go over 180 it's gone so we could test that that phase out let's bring it back down to one person let's not get crazy because then I can't tell what's going on if stuff's too crazy we could say get rid of Jane Sam and we'll just go the one person going there and then the income level is at 175 175 so now we're married and so that lowered the amount so it starts to phase out there on the married filing joint threshold now also note that you could you could have multiple people that you could have people that have the American opportunity credit and the lifetime learning credit the lifetime learning credit gets capped out so if I went back on over and say okay my income is back to 50,000 and we said that we had these other people on the that were going just cool you too cool you too like Jane and Sam is going to cool you but student was not enrolled at least half time so he's doing he's kind of slacking over there Sam he's doing like part-time but he's working too he's a good kid he's a good kid so we're gonna go down here and say the qualified tuition let's put 20,000 again just to max it out and then let's say I had another one so that means they're qualified for the other credit lifetime learning because they didn't qualify for the American opportunity and then Jane let's say Jane completed first four years so she doesn't qualify for let's do it just one at a time first if I go back on over Jane hasn't been included yet Jane's not there yet so then I'm going to go back on over and say now we've got Adam that still qualifies for the American opportunity and then Sam that qualifies for the lifetime learning that lifetime learning amount flowing in to page one down here on the non-refundable we'll talk more about that later but notice that now you got a little bit mixing up mixing and matching down here with the lifetime learning credit on down below so we'll continue with discussion of that in the following presentation