 Income tax 2022-2023, lifetime learning credit tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040, populated with LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website, irs.gov, irs.gov. Starting point, we got the single filer Mr. Anderson living in 90210 Beverly Hills, W-2 income 100,000, standard deduction 12,950, taxable income 87,050, tax calculation then at the 14774. We're not going to have any withholdings because we're just going to be concentrating on the tax calculation at this time. We're now looking at the education. Credits specifically of the lifetime learning credit. Remembering that when we're thinking about these education credits, we will typically first see if we can qualify for the American Opportunity Credit because the credit is generally a higher credit, but it's more restrictive to qualify for it. And if we can't qualify for that, we're going to focus then on the lifetime learning credit, which is our point of focus. 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 this time. You will also generally get a tuition statement form 1098T from the Educational Institution, the college box one saying payments received for qualified tuition and related expenses. This usually being the baseline number to figure the qualifying expenses to calculate the education credits, whether that be the American Opportunity Credit or Lifetime Learning Credit. However, also realized that this form is going to the IRS. It's similar to a W-2 form reporting wages from an employer, which is also going to the IRS. But this box one here might not tie out exactly to the expenses that you're going to be using to calculate the credit because it might differ depending on your circumstances. Unlike with a W-2 form where the box one, which is the federal gross income, pretty much better match what's on the tax return or the IRS will probably have an issue with it. In this case, the IRS wants to have the form even if this box one doesn't tie out exactly to the expenses used to calculate the credit because at least this form tells the IRS that you did indeed go to college verifying it with this third party form. Alright, and then we got box four adjustments made for prior year. Box five scholarship or grants, which would have to be taken into consideration, possibly being reducing the number of qualified expenses to calculate the credit. Adjustments to scholarship or grants for prior year. Check if the amount in box one includes amounts for an academic period beginning January, March, 2024. That's that cut off kind of situation. So you paid for it in this case in 2023 in our case in 2022, but the college doesn't start until the next period of the following year. And then check if at least half time student. That's going to be a qualification that will take people out of qualifying for American opportunity credit, but you may still qualify for the lifetime learning credit. Check if a graduate student that will also oftentimes make you ineligible if you're a graduate student, meaning you've already done the first four years of college for college for the American opportunity credit, but you might still qualify for the lifetime learning credit and then insurance contract reimbursement and so on. Alright, so given that information, let's go back on over and let's add a education item. Alright, so the data input, I'm going to say it's for the taxpayer. And we're going to say these are items that will basically disqualify us for the most part for the American opportunity credit, which will default us to the lifetime learning credit. Let's first start with the American opportunity credit so we can compare and contrast it to the lifetime learning credit. We've got cool you that's where we went to school and this is the federal ID number. And then we've got the amount of the $4,000 and we'll keep it at that. So this 4,000 of qualified expenses is the maximum amount which will cap out the credit for the American opportunity credit, but not for the lifetime learning credit. So let's check it out. So if I go to the forums then nothing happened because of because if I go to page two, no credit happened because we're over the threshold for the income threshold for a single filer. Therefore, I'm going to bring the income down a bit. Let's bring the income down to like 75,000 for example. And then back on over and we're going to say, okay, now we're at 75,000 minus 12,950 gets to taxable income 62,050 page number two tax 9,274. And there's this is the credit 1,500. This is the American opportunity credit, not the lifetime learning credit, the other educational credit. And then 1,000 is the refundable portion of that credit as we discussed in a prior presentation. Now, if I go then to form 8863, we could see the calculation, the refundable American opportunity credit. You have the refundable part of it, the 1,000 and the non-refundable part down below. If I go to page number two, we see in essence, the information sheet to basically tell us whether we're looking at the American opportunity credit or the lifetime learning credit. Okay, so now let's pull it over and say that one of these things don't qualify so I can't get the American opportunity credit. So the non-qualifying factors include student was not enrolled in a screenwriting class. Gold at least half time for at least one academic period that began in 2022. So if that was the case, if I check that out off, we're going to say, all right, now it took us from the American opportunity credit to the lifetime learning credit. So that's what I mean about the American opportunity credit being a bigger credit, but more restrictive to bring us down to the lifetime learning credit. Now if I go then to page one, we can see the calculations is only calculating for the non-refundable education credits, which includes the lifetime learning credit and the credit amount is far less. If I go to the form 1040 page number two, we can see what's being pulled in here at the 800. There is no non-refundable portion for the lifetime learning credit as there is for the American opportunity credit. So we have a much smaller credit with that $400 amount. So notice if I go back on over and I increase this amount, if to max out the credit, I would need 10,000 of expenses, qualified education expenses to max out the credit to max out at 2,000. If I go back on over and I add more expenses beyond that 15,000, it's not going to go up any higher because it's been maxed out. So you need the 10,000 of the lifetime learning to max out at the 2,000 maximum credit as opposed to the American opportunity credit where you can max it out with 4,000 expenses, the maximum being 2,500. All right, let's go back on over to the education credits here and just note that if I check off any of these other boxes, same kind of thing, if I uncheck that one and then check this one, student completed first four years of post-secondary education. So they already basically did the undergraduate stuff and now they're like a graduate student, which could be indicated on this form here where it says that they're a graduate student. So this is the one they check off if they didn't do the half-time student. So that might be informed to you on the tuition statement. Check if a graduate student, meaning they've already done the first four years of education. So then once again, they would be at the lifetime learning credit. If I uncheck that, you could tell because if I uncheck that, now we're at the 1,000 plus the 1,500, which would be 2,500 as opposed to the 2,000. So let's go and check this one. Student was convicted before the end of 2022 of a felony for possession of distribution of controlled substance. So they put that one in there so that would disqualify you for the American opportunity, but not the lifetime learning. And then this one, you could force the lifetime learning credit here. So let's go back to the top one, just check one off. Now also note that down here with the tuition and fees, it's more restrictive on the tuition and fees. So it's more likely with the lifetime learning credit that the information to calculate the credit will basically be on the 1098T because books and things like that that you need to be purchasing for the lifetime learning credit basically have to be paid to the institution and be required to be done so. And therefore that's why this one books and supplies only for the American opportunity credit, the AOC, not the lifetime learning credit in that situation. So it's actually more restricted in terms of the expenses that can qualify towards this dollar amount, which would cap at the $10,000 than the American opportunity credit, although the lifetime learning credit is more broad in being able to qualify to at least take the credit. Also note that if you've got a scholarship or something like that that was tax free, then you didn't pay any taxes on it, which would be reported in scholarships and grants. Then you might have to basically reduce this number by the amount of scholarship and grants. And the general idea to my mind on the rationale for that is that the scholarship and grants, if they're not subject to income tax, then you'd be double dipping if you also got the credit with it. But also just realize that if you have a situation where you could include it in income and if you could include it in income and get the credit, sometimes the credit might outweigh the fact that you didn't have to include something in income. So you want to kind of keep that factor in mind. Let's actually do an example so you can see what I'm talking about here. So I'm going to change the income to $35,000. So we've got $35,000 of income, $12,950 standard deduction, $22,050 taxable income, Page 2 calculated the tax to $444. We've got the education credit coming in at $2,000. So that leaves us with the $444 of tax. Now let's imagine that we got a grant. If we got the grant of like $7,000, let's say, well then if the $10,000 were my education expenses and it was tax-free, then I may have to reduce the $10,000 by the $7,000. And so now if I go back on over, I would only got $600 of the lifetime learning credit, right? But I got the benefit of not having to include the $7,000 in income. So that's good. So now I still have the same income number, but I don't get to include the full $10,000 that was paid because part of it was from money that was like free money. So but then the question is, well, what if I was to include it in income? Can I include it? What if I was able to include it in income? Would the credit outweigh the benefit that I got from not including it in income because credits are worth more than a deduction, even though it's not a one-to-one situation here because we're calculating the credit based on the expenses. So it's not like a dollar versus a credit versus a dollar deduction. We're using those expenses to calculate the credit. I'd need $10,000 to get a $2,000 credit, right? So we can say, okay, well, does that make sense? Let's write this down. I'm going to say, well, it's starting off here. It would be at $600. And my tax is at the 1-844-1844. And let's imagine then we're going to say, okay, now let's imagine that I'm going to include this 7,000 in income if I could, and then get the full 10,000 of a credit. So now I'm going to get the 10,000 of expenses, which will calculate up to the full maximum $2,000 of a credit instead of $600 of a credit. But I have to include 7,000 in income to do that, let's say. So now I included 7,000 in other income just for the purpose of the example here. So we had 35,000. Now the money was no longer free. I'm going to say I included it in income to get me at the 42,000. So that's not good for taxes, because now that's going to increase my taxable income after the standard deduction. We're at the 29,050 taxable income, page two, calculating the tax at $3,284. But now instead of a $600 credit, if I can get that full $10,000 of expenses, I can maximize the credit at $2,000. So now the credit would be at $2,000 after this, and the tax is at the 1,284. So 1,284. So we have a difference of this, right? So it's kind of confusing as to whether or not it would be beneficial. I have embarked on a beneficial friend. To do that, but sometimes you want to kind of keep that in mind and see if it would be possible to basically calculate something towards the credit versus getting basically the equivalent of a deduction if it wasn't included in income. All right, let's look at the income threshold. So if I go back on over here, note that if the income goes up above $90,000, then the credit's going to disappear, right? So if I bring my income up and I go from, if I go into like the 80,000s, then I still have the 2,000. If I go anywhere over 80, it's going to start to phase out 85,000. It starts to phase out. And then if I get to the 90,000, then the credit is gone. Those numbers are in essence doubled. So when you get to 180,000 if married filing joint, that's when the credit basically disappears for the married filing joint. On the other side, if I bring things lower, if I say my income was like 20,000 and I go back on over, that means page one, we've got our 20,000. So we only have, after the standard deduction, 7,050 taxable income, page number two, we only have a tax of $708. So the credit wipes out the tax, but I don't get any of that refundable portion. So there's no refundable portion of the lifetime learning credit as there is for the American Opportunity Credit. If I was to go back on over, for example, and say, what if I qualified for the American Opportunity Credit? Then it would take me to zero and I'd still get that $1,000 refundable portion to it. So there's the income thresholds. Let's go back to the lifetime learning credit and let's bring the income back to like 75,000, 75,000. Now let's imagine that Mr. Anderson is a head of household filer with a dependent, John Anderson here, who is going to school. So the dependent now being the person who's going to be qualifying for the credit. So same basic scenario, 75,000 this time, 19,400, because now we're assuming head of household as opposed to 12,950 single gets the taxable income, 55,600 page number two, 6,382 on the tax. And we get, of course, the 2000 of the credit. We're still maximizing the credit out, assuming the $10,000 of qualified expenses, but not for the taxpayer this time, but rather a dependent. Now if you add another dependent, notice there's a maximum of the lifetime learning credit. So I can't have another dependent claim the lifetime learning credit. Let's check that out. But we can have another dependent claiming the American opportunity credit. So now I'm going to have Jane in here also going to the same school. Let's say that she doesn't qualify for the American opportunity credit, but she does qualify for the lifetime learning credit and the tuition is 10,000 again to max it out for Jane. So if I go back on over, no, no difference, no change, nothing happened because we can only have one of them qualify per basically return. So we're still maxed out of the 2000. But if I was to say that Jane qualified for the American opportunity credit, then I'm going to go back on over now. We have a substantial difference on page number two. It's at the 3500 here and the 1000. So again, if I if I change it so she doesn't qualify lifetime learning, you only get one lifetime learning per back to 2000 per return. But if I was to kick it up to allow her for the American opportunity credit, now you've got one lifetime learning credit, one American opportunity credit, not for the same student. However, not for the same expenses. So you got to apply the expenses per social security number, one credit per social security number, American opportunity credit. You can have multiple people claiming that, but the lifetime learning credit, you're limited to one lifetime learning credit per return, which is kind of strange. But we're going to go back on over so you can see the calculations here. And then on page number two, this is kind of like the questionnaire that helps you to see whether or not you qualify for which other which credit. So did the student receive a form 1090 80 generally you should have had to receive that. Did the student receive 1090 80 from this institution for 2021 enter the institution's employer identification number, which you need at least for the American opportunity credit has the American opportunity credit been claimed for this student. For any for prior tax years. If no, then that would be good you could still claim the American opportunity if yes you go to the lifetime learning was the student enrolled at least half time for at least one academic period and so on. If yes, you may be able to do the American opportunity if no stop go to line because you're going to go to the lifetime learning. Did the student complete the first years four years of post secondary education and you can see this one on the second one here. That will in any case that's going to be another requirement for whether they get the American opportunity credit or not. What's the student convicted of the felony and so on. And then down below you could see it's going to lifetime learning in this case. Page number two. You can see it's going to the American opportunity and that information is what's pulling on to page one where we have the refundable portion of the American opportunity so it's not broken out specifically to make American opportunity versus lifetime learning. It's the refundable portion of the American opportunity and then the non refundable education credits includes the non refundable part of the lifetime of the American opportunity credit and the lifetime learning credits the general idea.