 Income Tax 2022-2023 American Opportunity Credit Who Can Claim A Dependence Expenses Let's do some wealth preservation with some tax preparation Most of this information comes from Publication 970 Tax Benefits for Education Tax Year 2022 You can find it 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 in the credit area remembering the first half of the income tax formula is in essence an income statement although a strange one ending at taxable income similar to a normal income statement ending at net income we then calculate the tax on the taxable income not with one rate not with a flat tax but with the progressive tax system to get to the tax before credits and other taxes then we get to those credit areas down below as well as the other taxes such as self-employment tax for example then we have the payment which could be in the form of estimated tax payments or withholdings to get to the bottom line finally tax refund or tax due also credits similar to deductions and that we like them both but if we can get a dollar credit versus a dollar deduction we would rather generally have the credit because we get the full dollar benefit of the credit as opposed to a dollar deduction which simply decreases the taxable income and the benefit we get will be dependent upon our tax rate also the credits are broken out into the refundable credits and non refundable credits the non refundable and the refundable credits the non refundable credits do not take the tax liability below zero the refundable credits do and when they do they make the tax system more into like a welfare benefit program for that component as opposed to a tax system at that point all right we're talking about the american opportunity credit we're asking the question now who can claim a dependence expenses so the dependent where somebody's going to school going to college or something like that who is the one that gets the benefit of possibly claiming those expenses in order to calculate the american opportunity tax credit so if there are qualified education expenses for your dependent during a tax year either you or your dependent but not both of you can claim an american opportunity credit for your dependence expenses for that year so you've got one person their social security number the expenses are tied to them that social security number and that person might then be doing their own taxes or might be claimed as a dependent on someone else's returns is the is the general idea you can't double dip on it claiming the same expenses on two different returns that would not be correct can't do that so for you to claim an american opportunity credit for your dependence expenses you must also claim your dependent on your tax return so if you're like a parent you got a kid that's going to school college kid or something young adult we could say going to school then uh then if you're claiming them as a dependent then you would have them reported on your return page one in the dependence their social security number and everything and then possibly you would be the one getting the benefit of the expenses paid for the education expenses possibly in the form of an american opportunity tax credit so you do this by listing your dependence name other required information on form 1040 or 1040 SR so let's go through the if and then statements here if you claim on your tax return a dependent who is an eligible student then only you can claim the american opportunity credit based on that uh dependence expenses so you're for example a parent if you the parent claim on your tax return a dependent who is an eligible student then only you can claim the american opportunity credit based on that dependence expenses, the dependent can't claim them in that case. If you don't claim on your tax return, a dependent who is an eligible student, even if entitled to claim the dependent, so you don't claim them as a dependent, then only the dependent can claim the American opportunity credits because now they would get the benefit you would think, right? Although, well, in the case, you can claim the credit based on this dependence expenses. So you kind of have, you can say, well, which would be better in a situation? Well, normally, if someone qualifies as a dependent, that's because they don't have much income, possibly because they're going to school and attempt to be able to generate more income in the future than they are currently generating. And because we have an income tax, you would think that they would, they would not be as benefited as the parent to claim the credit in most cases because they might have income, they're more likely to have income, and then get a benefit of claiming the dependent, which could have other benefits as well, such as, well, other benefits could be related to that dependent, and they might be more likely to benefit from the credit. Although, you could imagine weird situations where like the parent, for example, has a high amount of income or something like that, and maybe the credit phases out or something, and the child then may not have much income, but if there's a refundable portion of the credit, could still benefit from, you know, a refundable portion of the credit or something like that in, you know, situations that could be different than the norm, but you would expect that the parent might benefit more due to having income than, and it being an income tax, even though it's a credit situation, okay. Expenses paid by dependent. So if you claim on your tax return an eligible student who is your dependent, treat any expenses paid or deemed paid by your dependent as if you paid them. So here we get into that situation again, if the general idea would be that, you know, whoever's claiming the person that went to school on the return as a dependent or if not a dependent, the student themselves or the individual themselves, then would basically get the credit. It doesn't really matter so much where the funding is and that would kind of make sense, right? Because if the student paid for the education expenses themselves, they actually wrote the check, but they are dependent and on the tax return of a parent, you would expect that the money that they wrote the check with basically, you know, still is being provided in essence by the parent because they're basically dependent in that case. So you would say, well, do I have to logistically make sure that the parent writes the check that goes to school instead of the student in order to make sure I qualify for the credit? That would be kind of a, you would think you wouldn't really need it because they're already a dependent, okay. So include these expenses when figuring the amount of the American opportunity credit. So expenses paid by you. So if you claim a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. So you're the one that paid the expenses, you're there a dependent. So you're in that case, you would be using those expenses possibly for the American opportunity credit claiming if neither you nor anyone else claims the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. So now you're in a situation if neither you nor anyone else claims the dependent. So now no one's claiming getting the benefit of these payments, then the dependent can include any expenses paid when figuring the American opportunity credit are expenses paid by others. So someone other than you, your spouse or dependent such as relative or former spouse may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student as is treated as receiving the payment from the other person and in turn paying the institution. If you claim the student as a dependent on your tax return, you are considered to have paid the expenses. Okay. So now you've got the rich uncle stepping in and saying, I'm not claiming the student as a dependent, but I'm going to pay for the college and if I pay for your college, if they pay the college directly, then now the question is, well, now the rich, the uncle, is he the person that's going to be able to get the credit? And it's like, well, no, because you're not claiming the student as a dependent. Well, who gets someone should get the benefit, right? Well, it's still basically the money is tied to, in essence, the student, the social security number who's ever claiming that student as a dependent, which if it was the student themselves, even though it was paid by the uncle, you would think then if it was the student was claiming themselves, you know, on their tax return, then they would be able to use those expenses would be logical. Otherwise you would say, well, the uncle has to pay the student and then the student has to write the check to the financial institution, which is just a logistical thing, like it doesn't really matter. You know, you can assume that, you know, that that is the case kind of like withholdings, like are the case where the employer took your money and paid the IRS on your behalf, right? Instead of giving you the money and you giving it to the IRA. And then of course, if if the student is a is claimed by the parent, now you've got the uncle that paid the financial, the finances for the college for the student, it's still tied to the student. But now the student is a dependent of the parent. So you would think the parent who's claiming the dependent possibly would be eligible to take the credit in that case. Alright, let's look at some example. Example, in 2022, Todd's grandparent makes a payment directly to an eligible educational institution for Todd's qualified education expenses. For purposes of claiming and American opportunity credit, Todd is treated as having as receiving the money from the grandparent and in turn paying the qualified education expenses himself. So unless Todd is claimed as a dependent on someone else's 2022 return, only Todd can use the payment to claim an American opportunity credit. Alright, not the grandparents because the grandparents aren't claiming him as a dependent. So if anyone such as Todd's parents claim Todd on their 2022 tax return, whoever claims Todd may be able to use the expenses to claim an American opportunity credit. If anyone else claims Todd, Todd can't claim an American opportunity credit because you'd have two people trying to use the same expenses to claim the credit in that case. So tuition reduction. When an eligible educational institution provides a reduction in tuition to an employee of the institution or spouse or dependent child of an employee, the amount of the reduction may or may not be taxable. So if it is taxable, the employee is treated as receiving a payment of that amount and in turn paying it to the educational institution on behalf of the student. So in other words, now you've got an employment type of situation, and and you're getting a benefit of the tuition payments. So the question is, well, is that going to be included say on box one of like your form 1040 in which case it would be income and you'd be paying taxes on it. If you are then then then you would you can treat it in a similar fashion here with fashion like well, you got them you got the money and then you paid for the tuition, it would be like the same situation as if you got the money and then you paid the tuition instead of the money going back and forth. You just kind of assume that that's the case. But if you got a tax benefit from that, meaning you didn't include it on box one of the W2 for example, then you're not paying federal taxes on it. And that kind of changes, you know, the scenario bit because now since so now since you didn't pay taxes on it, the question would be you may not be able to take the expenses because you already got a tax benefit to benefit for those to apply to the credit situation, which we believe we talked about in a prior presentation. So for more information on tuition reductions, you can see qualified tuition reduction in chapter one.