 Income tax 2022-2023, American Opportunity Credit, Figuring the Credit. Let's do some wealth preservation with some tax preparation. Most of this information comes from Publication 970, Tax Benefits for Education Tax You 2022. You can find it at the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're down here in the credit area. Noting the first half of the income tax formula is in essence an income statement, although a strange one, where the bottom line is taxable income, similar to net income on a normal income statement. We then take taxable income to calculate the tax, not using one rate, but using the progressive tax system to get to the tax before credits and other taxes. Finally then, we're at the credit location on down below and other taxes like self-employment tax and whatnot. And then we deal with the payments, which could be estimated tax payments or estimated tax payments or withholdings to get to the tax refund or tax due. Also, note the credits are similar to deductions and that we like them. 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. Them both, but if we can get a dollar credit or dollar deduction, we typically want the dollar credit because we usually get the full dollar worth of benefit as opposed to the dollar deduction which just decreases the taxable income, the benefit being dependent upon our tax rate. Also, remember that we have the non-refundable credits and the refundable credits. Non-refundable credits do not take the tax liability below zero where the refundable credits do transform in the tax code into not just taxes, but kind of a welfare or benefit program for that refundable portion. All right, let's go to this. We got the figure in the credit. We're on the American Opportunity Credit. Let's talk about how to figure that thing. The amount of the American Opportunity Credit per eligible student is the sum of 100% of the first 2,000 of qualified education expenses paid for the eligible student and 25% of the next 2,000 of qualified education expenses you paid for the student. So when you're thinking about your expenses, we're compiling our expenses together. We talked about what qualifies for an education type of expense and we get 100% of the first 2,000, great, and then 25% of the next 2,025% is going to be that $500 and so that the total credit then is going to be capped by that at $2,500 per student. So the maximum amount of American Opportunity Credit you can claim in 2022 is $2,500 multiplied by the number of eligible students. You can claim the full $2,500 for each eligible student for whom you paid at least 4,000 of adjusted qualified education expenses. So notice that 4,000 is a fairly low number to get that maximum amount of credit because college is quite expensive these days. So you've got the 4,000 that has been paid in order to maximize the credit out per student at the 2,500. So 4,000 of adjusted qualified education expenses. However, the credit may be reduced based on your MAGI, that's your Modified Adjusted Gross Income. So we have that income phase out as your income goes above the threshold, then the cap of 2,500 that you could get from the credit could be reduced for that phase out. See effect of the amounts of your income on the amount of your credit later. Let's look at an example. Jack and Kay are married and file a joint tax return. So Jack's no longer married to Jill. Now he's married to Kay, Jack and Kay are married. So for 2022, they claim their dependent child on their tax return. Their MAGI Modified Adjusted Gross Income is $70,000. Their child is in the junior third year of studies at the local university. Jack and Kay paid qualified education expenses of $4,300 in 2022. So Jack and Kay, their child and the local university met all of the requirements for the American Opportunity Credit. Alright, so how much do we get? Jack and Kay can claim a $2,500 American Opportunity Credit in 2022. This is 100% of the first 2,000 of qualified expenses, plus 25% of the next 2,000. So notice they paid 4,300 that added 300. They didn't get any benefit from the credit above that mark because they take the 4,000, right? The 100% of the first 2,000 and then the 25% of the second 2,000. That's it. Okay, so form 1098T also note they didn't hit the income threshold for the Modified AGI at 70,000 in order to start reducing the credit due to the AGI phaseouts. Alright, form 1098T. To help you figure your American Opportunity Credit, a student may receive form 1098T from the educational institution. Generally, an eligible educational institution such as a college or university must send form 1098T or acceptable substitute to each enrolled student by January 31st, 2023 and institution will report payments received box one for qualified education expenses. However, the amount on form 1098T might be different from what you paid when figuring the credit use only the amounts you paid or are deemed to have paid in 2022 for qualified education expenses. So the financial institution has to pay out or give out this 1098T. The government, the IRS wants to see that because even if the amount on the 1098T is different than what you actually paid for whatever reason, meaning the amount of expenses you're using to calculate might differ than what's on the 1098T, although the 1098T should generally be a good number to use, but it might differ, but the IRS still wants the issuance of the 1098T because that at least indicates that you did indeed or someone did indeed attend college, which is now being verified by an outside third party of the college. Instead of the taxpayer. Okay, in addition, form 1098T should give other information for that institution such as adjustments made for prior years, the amount of scholarship or grants, which could have an impact that we've seen in prior presentation, reimbursements, which could have an impact or refunds, and whether the student was enrolled at least half time, which again could be one of the major requirements. All that information hopefully tidily packed into the form 1098T to make it easy to figure. So the eligible educational institution may ask for a completed form W9S. By the way, when I say so, it's nice and tidily packed and so it's easily to figure. I don't mean just by you. It's not for your behalf. It's for the college. It's for the government's behalf so they can double check right on their end. So if you report something different than what's on the 1098T, if you try to take the credit, even though you weren't a half time student, you were doing something less than half time, they might be able to see that on their end from like the 1098T or something more likely, you know, picking that up on their side. Okay, the eligible educational institution may ask for a completed form W9S request for students or borrowers taxpayer identification number and certification or similar statement to obtain the student's name, address and TIN. You have to give them the information in order for them to have the information to populate on the 1098T. So effect of the amount of your income on the amount of your credit. All right. The American opportunity credit is phased out gradually if your MAGI, your income phase out, which is your adjusted gross income, which is modified. So basically your adjusted gross income with a slight modification is between 80,000 and 90,000, 160,000 and 180,000 if you are a joint return. So you probably aren't going to like need to understand the phase outs completely in your mind, like to be able to calculate them in your mind when you're discussing these things with a client or someone like that. It's enough. Usually you're going to be able to say, hey, look, you get the American opportunity tax credit. You get benefits up to like 4,000 per student because it takes the first 100,000 of the 2,000 and then the 25% of the second. So it could be up to 2,500. And that's 4,000 of qualified expenses. And then it starts to phase out as your income goes up and the threshold for it starting to phase out is 80,000 and you lose it completely fairly quickly at the 90,000 or if married, it starts to phase out at 160 and you lose it fairly quickly at 180. So you probably in other words don't need to say, well, I know exactly what your credit will be by calculating if your income was 85,000 in a discussion. You're going to rely on the software to some degree to help you out with that calculation so that you can have the general ideas and then you can deconstruct so that you can project into the future, discuss what is going on logically from the broad strokes and then when doing tax preparation, of course you will have the form and you can enter that into the system and deconstruct to make sure everything's properly calculated. All right. You can't claim an American Opportunity Credit if your MAGI Modified Adjusted Gross Income is 90,000 or more, 180,000 or more if file a joint return. Modified Adjusted Gross Income, the MAGI. For most taxpayers, the MAGI is Adjusted Gross Income, just the AGI or AGI Adjusted Gross Income as figured on your federal income tax return. So MAGI, when using Form 1040 or 1040 SR, if you file Form 1040 or 1040 SR, your MAGI is the AGI Online 11 of that form modified by adding back any, so these are the modification portion of the MAGI Modified AGI. One, Foreign Earned Income Exclusion. So that's going to be the big one but it would only be there if you had that Foreign Earned Income Exclusion. Two, Foreign Housing Exclusion. Three, Foreign Housing Deduction. Four, Exclusion of Income by Bonafide Residents of America, Samoa, and five, Exclusion of Income by Bonafide Residents of Puerto Rico. All right. Here's the worksheet for the MAGI. If you have these components that are in place, I won't go into it in detail here. This is another area where it doesn't hit everyone with these MAGI because oftentimes if these aren't in effect, it'll just be your AGI. And of course, software can help you out in those scenarios as well and you can kind of deconstruct using software. So phase out. If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines two through seven of form 8863 part one. The same method is shown in the following example. You are filing a joint return and your MAGI is 165,000. In 2022, you paid 5,000 of qualified education expenses. You figure a tentative American opportunity credit of 2,500 because you paid more than the 4,000 and therefore you maxed out at 2,500 if you didn't have an AGI phase out for your income level, which we're assuming we will have here. So 100% of the first 2,000 qualified expenses plus 25% of the next 2,000. Okay. Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit 2,500 dollars by a fraction. The numerator top part of the fraction is 180,000. The upper limit for those filing a joint return minus your MAGI. So the denominator bottom part is 20,000, the range of income for the phase out 160,000 to 180,000. The result is the amount of your phased out reduced American opportunity credit 1,875 in this case. So you're probably not going to do that like in your head, you know, and be able to, because you're going to just look at the range of when the phase out starts and ends and then the salt will probably help you out with this calculation in most cases, although it's not that complex to calculate, but I'm just saying 2,500, 180,000 minus the 165 over the 20,000 gives us that 1,875. All right, refundable part of credit. 40% of the American opportunity credit is refundable for most taxpayers, meaning the refundable portion of the credit is the amount that could take the tax liability below zero. If you don't owe any tax, you still get like a quote refund in quote or a benefit program. That's when the tax goes used as more of a welfare program, benefit program, as opposed to tax system. However, if you were under age 24 at the end of 2022 and the conditions listed below and the conditions listed below apply to you, you can't claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, you're allowed credit figured on form 8863 part 2 will be used to reduce your tax as a non-refundable credit only. Okay, so you don't qualify for a refund if item 1, A, B, or C2 and 3 below apply to you. One, you were A under age 18 at the end of 2022 or B age 18 at the end of 2022 and your earned income defined below was less than half of your support defined below or C over 18 and under 24 at the end of 2022 and a full-time student defined below and your earned income defined below was less than one half of your support defined below meaning in essence you're kind of you could be subject to being a dependent in those cases. It's possible to be a dependent you might qualify for a dependent status in those cases. Okay, 2, at least one of your parents was alive at the end of 2022. 3, you are filing a return as single head of household qualified surviving spouse or married filing separately for 2022. Earned income. Earned income includes wages, salaries, professional fees and other payments received for personal services actually performed. Earned income includes the part of any scholarship or fellowship grant that represents payments for teaching research or other services performed by the student that are required as a condition for receiving the scholarship or fellowship grant. Earned income doesn't include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. If you are a sole proprietor or a partner in a trader business in which both personal services and capital are material income producing factors earned income also includes a reasonable allowance for compensation for personal services but not more than 30% of your share of net profits from that trader business acting the deduction for one half of self-employment tax. However, if capital isn't an income producing factor and your personal services produced the business income the 30% limit doesn't apply. Support. Food, shelter, clothing medical and dental care education and the like generally the amount of the items of support will be the amount of expenses incurred for furnishing such item. So if the item of support is in the form of property or lodging measure the amount of such item of support by its fair market value. However, a scholarship received by you isn't considered support. If you are a full-time student you can see publication 501. So you're looking at the support to see if you would qualify for in essence the support test to be claimed as a dependent by someone else if you were eligible to be claimed as a dependent. Full-time student. You are a full-time student for 2022 if during any part notice we're talking about full-time student here not because it's a requirement to claim the credit but because full-time student may be one of the requirements to see if you would be possibly able to be claimed as a dependent by someone. So that would be like if you're under if you're if you're still under 24 full-time student possibly you could still be claimed as a dependent if all the other dependency tests would be met. So you are a full-time student for 2022 if during any part of any five calendar month during the year you were enrolled as a full-time student at an eligible educational institution defined earlier or took a full-time on-farm training course given by such an institution or by a state county or local government agency.