 Income Tax 2021-2022 American Opportunity Credit. Get ready to get refunds to the max. Dive into Income Tax 2021-2022. Most of this information can be found in Form 8863 Instructions Tax Year 2021 IRS website, irs.gov, irs.gov. Second half of the income tax formula in the credit area, noting that both credits and deductions are good, if you had a dollar credit versus a dollar deduction. The dollar credit would typically be better because you generally get the full amount of the credit as opposed to the dollar deduction where you only get a decrease to the taxable income the tax then applied on it. Note also that we have two main categories for the credits. We got the non-refundable credits. We got the refundable credits. The non-refundable credits don't take the tax liability below zero, but the refundable credits may, which means you could possibly get a refund. It's not really a refund, but it's more like a benefit program with the refundable credits. Many credits may have both a non-refundable component and a refundable component to them. This is the Form 8863, the Educational Credits, the American Opportunity Credit, Lifetime Learning Credits. We think of them kind of squished together on one form because we try to figure out whether we can get the first credit, the American Opportunity Credit, the one that has a bigger benefit typically, not then go for the second credit, the Lifetime Learning Credit. That's the general thought process. Page 2 of the Form 1040, we're looking at the credit area. This is the non-refundable credit area, Line 20. This is the amount that rolls into the Schedule 3, then rolls in here to Line 20 of the Form 1040 on Page 2. Bottom of Page 2 of the Form 1040, this is the refundable area where we have the refundable portion on Line 29 from the American Opportunity Credit from Form 8863, Line number 8. We're going to focus in this time on the American Opportunity Credit. Don't claim the American Opportunity Credit for two years after there was a final determination that your claim was due to reckless or intentional disregard of the rules or 10 years after there was a final determination that your claim was due to fraud. So if there was some kind of problem like that because remember that these credits are things that fraudsters might try to take advantage of. So the IRS is trying to detour that by removing the ability to take the credit if there was kind of abuse involved in it. So you've got to kind of keep that in mind. Note that the IRS could always basically come back and issue an audit for... You may be able to claim a credit of up to $2,500 for adjusted qualified education expenses. We'll talk more about that and what those are later paid for each student. So now we're talking about each student who qualifies for the American Opportunity Credit. This credit equals 100% of the first 2,025% of the next 2,000 of adjusted qualified education expenses paid for each eligible student. So we've got each student that we're dealing with here as opposed to basically the max per return, for example, and then the expenses that we're paying if we had expenses of 4,000 that were paid, we can get the full amount 100% of the first 2,000 and then of course the next 2,000 that we paid, we get 25% of it. There's the 500 plus the 2,000 gets us to that 2,500. And once again, remember that that's for each student who qualifies for the American Opportunity Credit, not on a per return basis. So the amount of your credit for 2,021 is gradually reduced or phased out as it's often called. If your MAGI, that's your Modified Adjusted Gross Income, is between 80,000 and 90,160,000 and 180,000 if you file a joint return. You cannot claim a credit if your MAGI, your Adjusted Gross Income, is 90,000 or more. That's 180,000 or more if you file a joint return. Tip, if you can choose between using a student's adjusted qualifying education expenses for the American Opportunity Credit or the Lifetime Learning Credit, the American Opportunity Credit will always be greater than the Lifetime Learning Credit. That's why we typically think about these. We say, okay, we've got these expenses for the education expenses. Let's think about them first applying them to the American Opportunity Credit, and then we'll qualify. We'll provide greater benefits to us, but if not, then we default to the Lifetime Learning Credit. That's the general thought process. Student Qualifications, generally you can claim the American Opportunity Credit for a student on a 2,021 tax return only if all the following seven requirements are met. Seven requirements, number one, as of the beginning of 2,021, the student had not completed the first four years of post-secondary education. Generally, the freshmen through senior years of college as determined by the eligible educational institution. So that's determined by the institution. So for this purpose, don't include academic credit awarded solely because of the student's performance on proficiency examinations. Number two, the American Opportunity Credit has been claimed by you or anyone else for this student for any four tax years before 2,021. So this first one, you might go in and say, okay, if someone's going to college, they might get through college in the four-year timeframe, but it might take them longer than four years to go through what you generally think of as the post-secondary, four-year, post-secondary. So you've got that four-year kind of rule which is somewhat dependent on the rules of the institution, in other words. But you also have the second rule, which makes it a little bit more clear that they want to keep it to four years, which is that you can't claim the American Opportunity Credit for more than four years. So you might have a student that basically is spending five or more years for the post-secondary education that usually we think of as like a four-year or classically we've thought of as a four-year kind of thing, but then you're capped to how many years you can claim the credit which is four. So if you claimed it for four years, then you can't claim it again. So let's do those two one more time. As of the beginning of 2021, the student had not completed the first four years of post-secondary education, generally the freshmen through senior years of college. So that's freshman through senior year. That could take longer to get to that traditional set of educational requirements than four years depending on the circumstances of the student. So it's as determined by the eligible educational institution for this purpose, don't include academic credit awarded solely because the student performed on proficiency examinations. And then number two, the American Opportunity Credit has been claimed by you or anyone else for the student for any four tax years before 2021. So four years is the cap in that way as well. So if the American Opportunity Credit has been claimed for the student for any three or fewer tax years before 2021, this requirement is met. Example one, Sharon was eligible for the American Opportunity Credit for 2015, 2016, 2017, and 2020. Her parents claimed the American Opportunity Credit for Sharon on their 2015, 2016, and 2017 tax returns. Sharon claimed the American Opportunity Credit on her 2020 tax return, the American Opportunity Credit has been claimed for Sharon for four tax years. So notice that you had a gap in the tax years, 15, 16, 17, but she still hadn't claimed the last one for the fourth year, which she then claimed for 2020. And also note, you're talking about one eligible student where the credit was claimed on two different tax returns for two different people, right? So the parents claimed her for 2015, 16, and 17, and then in 2020, she claimed, but that's four years in total for this individual. Therefore, the American Opportunity Credit cannot be claimed for Sharon for 2021. If Sharon were to file form 8863 for 2021, she would check yes for part three, line 23, and would be eligible to claim only the lifetime learning credit if she meets all the requirements. Example number two, Wilbert was eligible for the American Opportunity Credit for 2017, 2018, 2019, and 2021. His parents claimed the American Opportunity Credit for Wilbert on their tax returns for 2017, 2018, 2019. No one claimed the American Opportunity Credit for Wilbert for any other tax year. The American Opportunity Credit has been claimed for Wilbert for only three tax years before 2021. Therefore, Wilbert meets the second requirement to be eligible for the American Opportunity Credit. If Wilbert were to file form 8863 for 2021, he would check no for part three, line 23. If Wilbert meets all other requirements, he is eligible for the American Opportunity Credit. So once again, there was kind of a gap in the years that we saw here and we have two different returns that we're talking about, only three years were claimed on the parents' return. So you got that last year. Student qualifications. Generally, you can claim the American Opportunity Credit for a student on a 2021 tax return, only if all of the following seven requirements are met continued. We're on number three now for at least one academic period, beginning or treated as beginning. See next in 2021, the student, both A, was enrolled in a program that leads to a degree, certificate or other recognized educational credential and B, carried at least one half of the normal full-time workload for his or her course of study. The standard for what is half of the normal full-time workload is determined by each eligible educational institution. So notice you might have different kind of ratings for the course links, for example. So you want to make sure that you're talking to the institution who should have an understanding of these terms and the credits related to them to make sure that if you're depending on these credits that you're qualifying for the credits with the amount of courses that you have with regards to B here, which has carried at least one half of the normal full-time workload for his or her course of study. However, the standard may not be lower than any of the established by the U.S. Department of Education under the Higher Education Act of 1965. So again, the financial institution, I mean the educational institution should be able to help you with those standards, but the educational institution can't themselves bring rules below a certain threshold, which hopefully if you're at a good place, they won't be, you can depend on the institution, hopefully to give you that information in general. So for 2021, you must treat an academic period beginning in the first three months of 2022 as if it begun in 2021 if qualified education expenses for the student were paid in 2021 for that academic period. Now, hopefully when you get the actual form, they'll be able to deal with this cutoff because remember for taxes, we're kind of like on a cash basis system. So we pay for the tuition, but we're going to pay for the tuition before we actually take the courses. So now the IRS often has this issue that they don't want you to prepay too much because they don't want you to be taking advantage of getting the credit before in an earlier year or something like that. So they're skeptical of prepayments, but usually you would be paying for the first three months of the following year in the current year, right? So you got that cutoff kind of thing going on here. And again, most of the time with the normal payment structures for most educational institutions, it should be somewhat standardized and you should be able to get that information reported to you properly on the documentation they provide you. Example, Glenda enrolls on a full-time basis in a degree program for 2022 spring semester, which begins in January of 2022. Glenda pays her tuition for the 2021 spring semester in December of 2021. So now she paid it in 2021, but she didn't get anything for it until 2022. In essence, she made a prepayment for her education that she hasn't yet gotten. Because the tuition Glenda paid in 2021 relates to an academic period that begins in the first three months of 2022, her eligibility can be an American opportunity credit in 2021 is determined as if the 2021 spring semester began as if the 2022 spring semester began in 2021. So in other words, you get to include it generally in 2021 to calculate your credit even though it's beginning in 2022 in that case because it's within the first three months of the following year. And hopefully that'll just be on the documentation for you when the school provides it. So they could explain that to you. You could explain it to clients, but hopefully that'll be provided. Therefore, Glenda satisfies this third requirement. Student qualifications. Generally, you can claim the American opportunity credit for a student on a 2021 tax return only if all the following seven requirements are met continued requirement number four. As of the end of 2021, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. So again, they kind of threw that one in there and I don't know how it relates to the credit. Other than maybe they had a lot of problems on schools with that kind of thing. And so they're like that kind of relates to this credit. But in any case, number five, filers and students must have been issued a TIN by the due date of their 2021 tax return, including extensions. Number six, the student received form 1098T from the educational institution for 2021 would you follow the procedures under form 1098T requirements that we looked at earlier? So typically you get the 1098T unless there's some weird condition that happens which we talked about before. Number seven, you must provide the educational institution's employer identification number the EIN which is going to be on the form 1098T but you got to put that on our form 8863. Tip, if the requirements above aren't met for any students, you cannot claim the American opportunity credit for that student. I may be able to claim the lifetime learning credit for Port or all of the student's qualified education expenses instead if certain requirements are met. We'll talk about that at a future time.