 Income tax 2022-2023. American Opportunity 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 single filer Mr. Anderson 90210 Beverly Hills is where he lives. W-2 income 100,000 standard deduction 12,950, 87,050 therefore being the taxable income. Page 2 calculated the tax at 14774 15,000 withheld bottom line 226. All right, we're focused on the education credits and particularly focused on the American Opportunity Credit. Remembering that there are two major education credits, American Opportunity Credit, Lifetime Learning Credit. If we can get the American Opportunity Credit, we'll typically want that one because you get more of a benefit. Benefit guys generally, but if you can't qualify for it, you might still be able to qualify for the Lifetime Learning Credit. So we're focused on the bigger one, the American Opportunity Credit. 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 credit this time. Usually, you will get a form 1098T from the educational institution, the school, which will have the information that can at least help you to populate the form. Also, remember the IRS will typically have this form as well as an indication that at least you were taking courses. So let's go over it quickly here. We've got the payments received for qualified tuition and related expenses. Now normally, if you're paying just for tuition for example, that's going to be populated here and you would expect that those would be qualifying expenses to be able to calculate the credit. However, we went over the other kinds of expenses that might be included. In other words, this number might not necessarily be the expenses that would be qualifying expenses for you, but you would think that it would include at least the tuitions that were paid. If you get into books and that kind of stuff, the question would be is that going to be in box one or not? And are those going to be qualifying expenses? From the IRS's perspective, you would think that you would at least need to have this 1098T so that the IRS can see that you at least were going to school even if box one doesn't tie out exactly to the qualifying expenses that you used to calculate the credits. Okay, box four adjustments made for prior year, box five scholarship or grants, which might be necessary to adjust the credit by the scholarship or grants if they're not included in income. For example, adjustments to scholarship or grants for prior year, check the box in box one includes amount for an academic period beginning January, March, 2024, meaning in this case, this is the 2023 item. So if you paid for something that happened in the first three months of 2024 that you actually paid for in 2023, so you have that cutoff thing, checked at least a half-time student. So were you a half-time student, which is a requirement for the American opportunity credit possibly not for the lifetime learning credit, checked if a graduate student, remember, we're looking for the first four years of expenses to qualify for the American opportunity credit, lifetime learning credit, more extensive contract reimbursement, insurance contract reimbursement. Okay, that's the form. Let's go ahead and populate this thing first assuming that it's for Mr. Anderson themselves and then we'll get into dependence. So if we look at the data input screen, I'm going to say it's for the taxpayer and because it's not for a dependent or the spouse, number of prior years, OIC, American opportunity credit claimed, there are no prior years. So we didn't claim it at all for prior years. And remember, we have four prior years student was not enrolled at least half time. So if I click this off and say they were not enrolled half time for at least one academic period, it would default to not being able to get the American opportunity credit, but possibly lifetime learning student completed first four years of post-secondary education. If I check that off, it will then say that I'm not going to be able to take the American opportunity credit but lifetime learning possibly student was convicted of a felony possession distribution of controlled substance that would disqualify the American opportunity credit, possibly lifetime learning though would still be available force lifetime learning credit that would be like an override. This is the institution we need the name and their federal ID number oftentimes. And then 2022 form 1098T was not received. Usually you will get a 1098T, but if you didn't get it, then you can go through the process. If you didn't have the 1098T, but you would still want to try to request it and get it from the college. 2022 1098T was received with box seven completed and then additional information, current year expenses, qualified tuition and fees. Let's put it at 5000, which is going to be over the threshold necessary to maximize out the credit because it's going to be 4000 to maximize out the credit books and supplies not entered above. So we'll get into that more shortly. If there were books and supplies that were not say on the 1098T, for example, we can we'll put that there. So okay, let's calculate this out. So nothing's going to be calculated for it now because we're past the threshold of the AGI threshold for a single file or with 100,000 of the income. So let's bring the income down. I'm going to bring the income down to 70,000 so we can see the calculation going back to the form. So now we've got the 70,000 12,950 standard deduction gets us to 57,050 page number two calculates the tax 8,174 and then the credit's a little bit confusing because we have that refundable and non refundable portion. So here's the non refundable part of the credit 1500. Here's the refundable part of the credit. Now note down here, the fact that it puts it down here as like the refundable part of the credit doesn't mean that that we're actually using it as a refundable credit because it's not taking the tax liability below zero. In this case, that's just the way the calculation kind of breaks it out. So that added together maximizes the credit out at the 2500, which you'll recall was to calculate the credit. It's it's the 100% of the first 2000 and then the second 2000, it's going to be 25%. So that's where it gets to 500 plus 2000 or the 2500 is generally the case and then the refundable portion is down here. 1000 of it is going to be refundable. If we go to schedule three, you can see that 1500 pulling in on schedule three. If I go to the form 8863, here's the education credits. So we've got the 2500. This is for the refundable American opportunity credit 2500. Enter 180 if married, 90,000 if single. That's going to be our income thresholds where it phases out if our income goes above that. Enter the amount of form 1040. This is our AGI pulling in at that 70,000. Subtract, if less than zero stopped, you can't take the education credit. Enter 20,000 if married, 10,000 a single head of household. So we have the 10,000 here. If line four is equal to or more than five, enter one online six. So we've got the one online six multiplied line one by line six caution if you were under age 24 at the end of the year and meet the conditions described in the instructions. You can't take the refundable American opportunity credit. So the refundable American opportunity credit multiply line seven by 40%. That's the refundable portion. That's where we get to the 1000. That's the amount that if your liability goes below zero, you might still get a benefit from it. And then we've got the non refundable portion, the portion that doesn't take the liability below zero. And that's going to be the 1500. And you can see the calculation of that here. Now note that if I bring this amount that we paid below, let's go back to our credit over here. Let's say it if it was at $4,000, we should still get the maximum 2500 credit between the refundable and non refundable portion. Let's see that on the form 1040 page two 1500 and 1000 if I go below that 4000, let's say we only had 3000. Now that's going to lessen the amount of the credit. So now we've got a lesser amount of the credit. And remember the general idea is I should still get 100% of the first 2000 plus whatever I plus the 25% of the second 2000. But I didn't have enough to get to the second 2000. So I got 100% of the first 2000 plus another 1000 times 0.25 is 250 plus 2000 is the 2250. So between the two of these, I've got the 1350 plus 900. Hold on a second, I've got 1350 plus 900 is 2250, right? And if I went the other way, if I brought my expenses all the way up to like 7000, that it's still going to be capped, the 4000 maximum expenses is going to cap my credit at between this and this, the 2500 for the American opportunity credit. Alright, now let's play with the income. And as we saw the phaseouts on the income, if I was single, if I go back on over here and say if that goes up to let's say 75,000, I'm still good. I'm still maximizing this out. If it goes up to we had it 100,000, it's going to go away entirely. So it goes away entirely at the 100,000 and it can't go over I believe it maxes it starts to phase out at 80,000. So if I go to like 81,000, then it starts to phase out here, you can see it starting to phase out. Now you probably don't need to know exactly what the calculation is to phase out because it'll help you to calculate the phase out here. The software will help to calculate the phase out. You can take a look at the worksheet for that. But the general idea is that if you once you hit the 80,000, it starts to phase out quite quickly and basically is basically gone by the time you get to the 90,000. So that's what when you're kind of discussing this with people, that would be the general idea. It's going at 90,000 if you're singled. And then if I go to like 87,000, that's within the phase out range. So now it's phasing out a lot less than it was. So it phases out pretty quickly. Once we get into that phase out range and it's below 80,000, if it's 79,000, then you're still getting the full credit. So that's kind of the general idea when you're basically discussing with people. It starts to phase out if you're single 80,000. And then if you're married, that basically doubles. So if I was to go and say, okay, what if we were married filing joint? And I go back on over here and I'd say, now the second page, we're maximizing that credit all the way up till we get to let's say 159,000, because it starts to phase out double of 80,000, 160,000. So we still maximize out here. And then if I go above that for a married couple, 165,000, we see it starting to basically phase out for the married. And then it's going to be completely gone at twice the 90,000, which is 180,000. So we're going to say 180,000 for the married couple, we lose it. So it's the married is kind of what you would expect from a credit kind of doubles everything from single to married in a way that you would kind of expect at least with the phase outs. Alright, so now I've gone back to I've gone back to to 70,000 and single. And let's say the income is going down. And just so we can see that refundable portion of the credit. So this if my if my tax liability waiver liability goes below zero, I still get a benefit from this 1000. That's why they broke it out over here. Whereas the other one's not going to go down. So if I say, okay, what if my income was only like, like 13,000, let's say, and then I go back to page one. Now I have 13,000 of income. And I'm still married. Let's get rid of the married thing. I'm going to say we're going to go back to single. And so now we've got the 13,000 12,950 standard deduction, we only have $50 of income now. So the tax is only $6, right? So then the amount that's non refundable is just going to be the $6 taking it down to zero. And then but then you still have this this refundable portion, which is now acting not as a tax type of thing, because it's not reducing the tax, it's acting as a welfare or benefit type of program. That's what it means to be the refundable portion. So even though they always have the refundable portion down here, it's really only acting refundable when your tax liability goes below zero. And they have to put it down here in the refundable portion because it acts like a payment in essence, because you'll get every dollar of it, even if the tax liability goes to zero. Now note that if I check off any of these items, like a student was not enrolled at least half time or student completed first four years. If I check any of those off, it's going to default to and let's bring my income back up to 70,000 or so 70,000, then it's going to say, well, you no longer qualify for the American Opportunity Credit, but possibly still qualify for the Lifetime Learning Credit. So I'm going to uncheck these, uncheck that, and then here we've got Lifetime Learning Credit is a non-refundable education credit. So now it's basically doing the calculation here for the Lifetime Learning Credit, which we'll go into in more detail in a future presentation, but it actually maxes out at 2000. So notice that obviously it's a smaller amount of the credit. Everything else is equal. If I was to get the, if I could qualify for the American Opportunity Credit, then I would have the full 2500 in this case. If I don't qualify for it, then we have the smaller credit, which will get into a future presentation 1400. Now also note that if we had a dependent, it might not, you might have a dependent who is the one that's going to college because they're under 24, for example, and so on qualifies a dependent, and they might be the one going to school. So now I've added a dependent for Mr. Anderson, which I'm assuming brings him up to possibly a head of household, possibly a head of household standards. We've got John on the books here, 70,000 of the income, 1400, because we're ahead of household now bringing the taxable income to 50,600 page number two, 5,782 tax. And then once again, we've got the 1500 and the 1000, this time not for us as the taxpayer, but for the dependent that is on the books. And if I go back on over to the, the credits for, that's not the one I want. We want the education credits. We can see the calculation for the education credit. What if we had two children that we're going to college? So now we've got a head of household status, John and Jill dependents, both of them going to college at this point. And so we're going to say page number two, we can see the credit at the 3000 up top plus the 2000 for 5,000. We note that if we only have one student, we can see the cap per student then for the American opportunity credit, 2,500. But if we have two students, then the cap twice that at then of the 5,000. Now it's also possible we might say, well, one of those students didn't qualify, let's say for the American opportunity credit, but they're still possibly qualifying for the lifetime learning credit, possibly they already cleared the four years or something like that. So now we can see the difference here, 2,500 and 1,000. We could see our calculation down below for the refundable American opportunity credit and the non refundable education credit here. And you can go basically to the questionnaires for John and Jill that give you kind of this information that would let you know if they qualify for the American opportunity credit or the lifetime learning credit. And so I'm not going, we're getting heavy on the time here, so I won't go into it in detail, but you can generally see that you can have the idea of you can't have one student claiming both the American opportunity credit and lifetime learning credit for the same expenses. But if you had two students and one qualified for the lifetime learning credit and the other qualified for the American opportunity credit, then you could have an instance where you're claiming both of those credits, but not for the same students or same expenses.