 Income Tax 2021-2022 Education Credits Overview Get ready to get refunds to the max, diving into Income Tax 2021-2022 Most of this information can be found in the form 8863 Instructions Tax Year 2021 on the IRS website, irs.gov, irs.gov Income tax formula down in the bottom half of the formula looking at the credit area noting that both credits and deductions are good, but if you had a dollar credit versus a dollar deduction the credit would typically be better you getting the full amount of the dollar as a benefit as opposed to the dollar deduction which would be a decrease to the taxable income the tax then calculated upon it. Also note that we have two main categories of the credits the non-refundable credits and the refundable credits the non-refundable credits don't typically take the tax below zero the refundable credits may result in a refund that's not really a refund if that was the case because it's kind of like a benefit program in that instance some credits might have a non-refundable and refundable component to them this is the form 8863 the education credits we're looking at the American opportunity and lifetime learning credits we typically think of them together we group them together because when you have the educational costs typically the credits are going to be the biggest benefits that you get from them and usually we have to go in a hierarchy to see if we can get first the one that's going to give us a more benefit for the credit and if we don't qualify for that one then we take the second credit which if we can still get that credit that's going to be the hierarchy or the thought process when we're thinking about these credits so we kind of got to combine them together as basically education credits and think of it through that thought process this is the second page of the form 1040 we're looking at the non-refundable areas kind of more towards the top of the second page line 20 this is the amount that's going to flow through from schedule 3 and be here on the second page of the form 1040 this is more down below on the second page of the form 1040 where we have the refundable section the refundable portion line 29 American Opportunity Credit from the form 8863 line number 8 okay so what's new with this credit you might be asking the limits on modified adjusted gross income the MAGI so we have this income phase out remember when you're thinking about the income phase out you're typically thinking not about the gross income but the AGI adjusted gross income and then oftentimes you have this kind of modify a modifier in front of the AGI for certain types of things that so they're going to take the AGI and adjust it for certain types of things usually kind of somewhat minor adjustments to it so it's basically an AGI phase out income phase out so the lifetime learning credit MAGI a limit increases to 180,000 if you're married filing jointly 90,000 if you're filing single head of household or qualifying with a widow where the American Opportunity Credit MAGI the limit remains unchanged reminders form 1098T requirements so this is the 1098T that will typically be giving the information about the expenditures that have been made for the education expenditures typically from a financial from an educational institution oftentimes so to be eligible to claim the American Opportunity Credit or the lifetime learning credit the law requires a taxpayer or a dependent to have received a form 1098T tuition statement from an eligible educational institution whether domestic or foreign however you may claim one of these education benefits if the student doesn't receive a form 1098T because the student's educational institution is required to furnish a form 1098T to the student under existing rules for example if the student is a qualified non resident alien has certain qualified educational expenses paid entirely with scholarships has certain qualified educational expenses paid under a formal billing arrangement or is enrolled only in courses for which no academic credit is awarded if a student's educational institution isn't required to provide a form 1098T to the student you may claim one of these educational benefits without a form 1098T if you otherwise qualify can demonstrate that you or a dependent were enrolled at an eligible educational institution and can substantiate the payment of qualified tuition and related expenses so in other words typically the educational institution will be issuing you a 1098T which will help guide you through the data input process that will be the general case and then you could have exceptions for those cases obviously if you had exceptions for those cases you need to be able to demonstrate that it is an exception and verify the fact that it's a valid expenditure qualifying under the rules here so reminders you may also claim one of these educational benefits if the student attended an eligible educational institution required to furnish a form 1098T but the student doesn't receive form 1098T because you file your tax return for example if the institution is otherwise required to furnish the form 1098T and doesn't furnish it or refuses to do so and you take the following required steps after January 31st 2022 but before you file the return you or the student must request that the educational institution furnish a form 1098T so they're supposed to do it they didn't do it they refuse to do it they're causing problems but you requested it you did your due diligence that's you know kind of another exception so you must fully cooperate with the educational institution's efforts to gather the information needed to furnish the form 1098T so if you say they say hey I need your address for the 1098T and you're like no but you got to give me a 1098T and well you know they can't fill out the 1098T without the information they have to have the information of course to fill it out to meet their requirements you must also otherwise qualify for the money and the benefits be able to demonstrate that you or a dependent were enrolled at an eligible educational institution and substantiated the payment of qualified tuition and related expenses the amount of qualified tuition and related expenses reported on form 1098T may not reflect the total amount of the qualified tuition related expenses paid during the year for which you may claim an education tax credit so once again let's do that one more time the amount of qualified tuition and related expenses reported on form 1098T may not reflect the total amount of qualified tuition related expenses paid during the year for which you may claim an educational tax credit so in other words you typically need a form 1098T in order to basically qualify generally unless some unusual circumstance happens however the amount on the 1098T may not be the only thing that could qualify towards edgy towards the credit for example so you may include a qualified tuition and related expenses that are not reported on form 1098T when claiming one of the related credits if you can substantiate payment of these expenses you may not include expenses paid on the 1098T that have been paid by qualified scholarship including those that were not processed by the university so if you made a payment but it was from a scholarship then obviously it's not like you really got the payment you got kind of scholarship money in order to pay for those costs so form 2555-EZ will no longer be available beginning with the tax year 2019 you will file form 1040 or 1040SR all references to these instructions have been revised accordingly if you need to file a prior year tax return use the form and instructions revised for that tax year caution to claim the American opportunity credit you must provide the educational institutions employer identification number the EIN on form 8863 you should be able to get this information from the form 1098T or the educational institution reminders continues banned on claim claiming the American opportunity credit if you claim the American opportunity credit even though you're not eligible you may be banned from claiming the credit for 2 to 10 years depending on your conduct so these credits of course are things that could be subject to people trying to commit fraud on them for example and claim them falsely and so this would be one kind of way to try to disincentifies that I see the caution statement under American opportunity credit later taxpayer identification number the TIN needed by due date of return if you haven't been issued a TIN by the due date of your 2021 return including extensions you can't claim the American opportunity credit on either your original or amended 2021 return also the American opportunity credit isn't allowed on either your original or an amended 2021 return for a student who hasn't been issued a TIN by the due date of your 2021 return including extensions form 8862 may be required if your American opportunity credit was denied or reduced for any reason other than a math or clerical error for any tax you're beginning after 2015 you must attach a completed form 8862 information to claim certain refundable credits after disallowance to your tax return for the next year for which you claim the credit you can see form 8862 and its instructions for more detail finding that on the IRS website irs.gov purpose of form use form 8863 8863 to figure and claim your education credits which are based on adjusted qualified education expenses paid to an eligible educational institution post secondary for 2021 there are two education credits we've got the American opportunity credit part of which may be refundable refundable being a good thing so and then we have the lifetime learning credit which is non-refundable so typically you're going to have the most benefit if you could qualify for the American opportunity credit but it's typically more stringent to do so and therefore if you don't qualify it then you default down to the lifetime learning credit and and that's the general thought process a refund credits can give you a refund when the credit is more than the tax you owe even if you aren't required to file a tax return a non-refundable credit can reduce your tax but any excess isn't refunded to you both of these credits have different rules that can affect your eligibility to claim a specific credit these differences are shown in table one so here's the table one you can kind of recap it for yourself but let's just do a quick run-through of this we've got the American opportunity credit versus the lifetime learning credits now remember when you actually fill out the forms you're kind of entering the data input and trying to see if you qualify for the first one if not then the second one but the general rules on a side-by-side so the maximum credit of the American opportunity up to two thousand five hundred credit per eligible student lifetime learning up to two thousand credit per return once again big difference here because the first one's for eligible student the second one per return so next we have the limit on limit on modified adjusted gross income this is the phased out limit that basically of the adjusted gross income with that modifier in front of it so the American opportunity credits one hundred and eighty thousand if married filing joint ninety thousand if single head of household or a qualified widow-widow we're a lifetime learning one hundred eighty thousand if married filing joint ninety thousand if single and so on same a refundable or non-refundable the American opportunity credit has forty percent of credit may be refundable the rest is non-refundable whereas the lifetime learning credits that is non-refundable all of it non-refundable credit limit to the amount of tax you must pay so then we have the number of years a post secondary education for the American opportunity credits available only if the student had not completed the first four years of post secondary education before two thousand twenty one so you've got that limit on how many years you can claim it but the lifetime learning credit is available for all years of post secondary education and for courses to acquire or improve job skills and then we have the number of tax years credit available American opportunity available only for four tax years per eligible student whereas the lifetime learning credit available for an unlimited number of tax years so then we have the type of program required for the American opportunity credit student must be pursuing a program leading to a degree or other recognized educational credential whereas the lifetime learning credit student doesn't need to be pursuing a program leading to a degree or other recognized educational credential number of courses American opportunity credit student must be enrolled in at least half time for at least one academic period during two thousand twenty one or the first three months of two thousand twenty two if the qualified expenses were paid in two thousand twenty one and the lifetime learning available for one or more courses a felony drug convention convictions they kind of threw this stuff in there you know for the so any case the American opportunity credit as of the end of two thousand twenty one the student had not been convicted of a felony for possessing or distributing controlled substances I guess that kind of relates because maybe they distribute those on campuses which is not good I don't know why that's in the educational thing but maybe that's why I don't know in any case for the lifetime learning credits felony drug conviction don't make the student ineligible for the qualified expenses for the American opportunity credit tuition required enrollment fees and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance a lifetime learning credit the tuition and required enrollment fees including amounts required to be paid to the institution for course related books supplies equipment so a bit more limited quite bit more limited for the lifetime learning there we've got the payments for academic periods payments for the American opportunity credit payments made in two thousand twenty one for academic beginning in two thousand twenty one or beginning in the first three months of two thousand twenty two that's for both lifetime learning and American opportunity credit that T. I. N. needed by taxpayer due date filers and student must have must have been issued a T. I. N. by the due date of their two thousand twenty one return and then we've got the educational institutions E. I. N. you must provide the educational institutions employer identification number so who can claim an education credit you might ask you may be able to claim an education credit if you your spouse or a dependent you claim on your tax return was a student enrolled and at or attending an eligible education institution so obviously if if it's single yourself if you're filing married yourself your spouses the spouses and then of course if you have the dependence typically children then possibly then as well for two thousand twenty one the credits are based on the amount of adjusted adjusted qualified education expenses paid for the student in two thousand twenty one for academic periods beginning in two thousand twenty one or beginning in the first three months of two thousand twenty two who can claim the education credit continued academic period and academic period is any quarter semester trimester or any study as reasonably determined by an eligible educational institution if an eligible educational institution uses credit hours or clock hours and doesn't have economic terms each payment period may be treated as an academic period for details see academic period in chapters two and three of publication nine seventy so most find it most educational institutions are somewhat standardized so they'll kind of have that as somewhat standardized but you might be somewhere that isn't standardized and then you have to go you have to get dig into that a little bit more so who can claim a dependence expenses if a student is claim as a dependent on another person's tax return all qualified education expenses of the student are treated as having been paid by that person therefore only that person can claim an education credit for the student if a student isn't claimed as a dependent on another person's return only the student can claim the credit so typically if you're talking about a student that's being claimed by a parent for example then you would think that the parent who is claiming that the dependent would that's where the credit would be located the return would be located there obviously if the student is filing their own tax return and is not a dependent then you would think that the credit would most likely be located on their actual return in that instance expenses are paid by a third party qualified education expenses paid on behalf of the student by someone other than the student such as a relative are treated as paid by the student however qualified education expenses paid or treated as paid by a student who is claimed as a dependent on your tax return are treated as paid by you therefore you're treated as having paid expenses that were paid by the third party for more information and on example see who can claim a dependent's expenses and publication as 970 so you know you got different situations where generally you might say well you had someone else paid for the educational expenses of a child that was on another person's return right so obviously if you're not the person that has that child as a dependent on your return you're not going to get the benefit of the credit on your return but you are obviously paying for the educational expenses of of the child if you're paying for their tuition or someone like something like that you would expect you would hope that somebody would would get the ability to take the credit and you would think then the person if it was a dependent like if an uncle paid for the educational expenses of a child that was you know there the dependent of another person you would think that whoever's claiming that person on the return would get the capacity to take those payments as the education expenses would be the general idea right because if it wasn't that case then you can say okay I gifted it to you'd have to work around you'd have to say okay the uncle gifted it to the brother or whatever who then paid for the tuition expenses so you see it's basically the same kind of thing so that's the general idea whoever in general you would think whoever is claiming the child as a dependent or if they're claiming themselves would generally be able to claim the deduction or credit on the return who's claiming the individual even if they themselves aren't the ones that paid for it such as an uncle or something paid for the tuition now obviously if it was a scholarship then that's a different situation because you got the scholarship money which basically paid for it who can claim the education credit who cannot claim a credit you cannot claim an education credit on a 2021 tax return if any of the following apply one you're claimed as a dependent on another person's tax return such as your parents so the student who's claimed as a dependent on someone else's tax return can't claim the credit on their tax return because you're claimed as a dependent on the parents you would think the person that would get the benefit from the parents tax return two your filing status is married filing separately so that married filing separate is always kind of an issue with many credits so number three because if you remember there's two kind of sets you can say married or non-married if you're not married you might be ahead of household or single for example and then if you're married you can't go back to ahead of household or single unless you're in kind of a gray or one of those kind of like a weird area you usually have to file either married or joint or married filing separate and married filing separate often causes issues with credits such as these so number three you or your spouse were a non-resident alien for any part of 2021 and didn't elect to be treated as a resident alien for tax purposes number four your MAGI basically your income your adjusted gross income is 180,000 or more if married filing jointly 90,000 or more if single or qualified widow-widow were with a dependent child five the student has not been issued a TIN by the due date of their 2021 return including extensions and so that's it generally your modified adjusted gross income is the amount on your form 1040 or 1040 SR line 11 that's generally your AGI adjusted gross income on the tax return however if you're filing form 2555 and earned income or form 4563 exclusion of income for bona fide residents of American Samoa or are excluding income from Puerto Rico at the amounts on form 1040 or 1040 SR line 11 that's where the modification comes in so you can see it's kind of an unusual circumstance so that's why they had to put the modifier of the modification in front of the adjusted gross income if you have tax software that obviously can help out with this a lot and if you're in that situation you can look at it more on publication 7 or 970