- 17 -
|
Page 17 of 79 Fileid: … tions/p970/2022/a/xml/cycle01/source 13:39 - 20-Jan-2023
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
materials. Bill’s adjusted qualified education expenses $613. Jane would be able to receive a $1,613 American
would be zero and there would be no education credit. opportunity credit ($1,000 refundable and $613 nonre-
Therefore, Bill's tax liability after credits would be $2,618. fundable), a $1,500 additional child tax credit, and a
$2,871 EIC. In total, Jane would be able to receive a tax
Example 3—Scholarship partially included in in- refund of $5,371.
come. The facts are the same as in Example 2—Scholar- If Jane includes $3,500 of the scholarship in income,
ship excluded from income. If, unlike Example 2, Bill in- Jane will be deemed to have applied $3,500 of the schol-
cludes $4,000 of the scholarship in income, the $4,000 arship to pay living expenses, and $2,000 to pay qualified
will be deemed to have been applied to pay for room and education expenses. The qualified education expenses
board. The remaining $1,600 of the $5,600 scholarship would be $4,000, and the AGI and MAGI would be
would reduce the qualified education expenses, and the $23,500. The tax liability before any credits would be
adjusted qualified education expenses would be $4,000. $413. Jane would be able to receive a $1,413 American
Bill's AGI and MAGI would increase to $40,450, the taxa- opportunity credit ($1,000 refundable and $413 nonre-
ble income would increase to $27,500, and the tax liability fundable), a $1,500 additional child tax credit, and a
before credits would increase to $3,098. Based on the ad- $3,191 EIC. In total, Jane would be able to receive a tax
justed qualified education expenses of $4,000, Bill would refund of $5,691.
be able to claim an American opportunity credit of $2,500 If Jane includes $1,500 of the scholarship in income,
and the tax liability after credits would be $598 ($3,098 − Jane will be deemed to have applied $1,500 of the schol-
$2,500). arship to pay living expenses, and $4,000 to pay qualified
education expenses. The qualified education expenses
Example 4—Scholarship applied by the postse-
would be $2,000, and the AGI and MAGI would be
condary school to tuition. The facts are the same as in
$21,500. The tax liability before any credits would be
Example 3—Scholarship partially included in income, ex-
$211. Jane would be able to receive a $1,011 American
cept the $5,600 scholarship is paid directly to the local
opportunity credit ($800 refundable and $211 nonrefunda-
college. The fact that the local college applies the scholar-
ble), a $1,500 additional child tax credit, and a $3,510
ship to Bill's tuition and related fees doesn't prevent Bill
EIC. In total, Jane would be able to receive a tax refund of
from including $4,000 of the scholarship in income. As in
$5,810. This is the highest tax refund among these sce-
Example 3, by doing so, Bill will be deemed to have ap-
narios.
plied $4,000 to pay for room and board. Bill would be able
to claim the American opportunity credit of $2,500 and the Note. Whether you will benefit from applying a schol-
tax liability after credits would be $598. arship or fellowship grant to nonqualified expenses will
depend on the amount of the student's qualified education
Example 5—Student with a dependent child. Jane,
expenses, the amount of the scholarship or fellowship
age 28 and unmarried, enrolled full-time as a first-year
grant, and whether the scholarship or fellowship grant
student at a local technical college to get a certificate as a
may (by its terms) be used for nonqualified expenses. Any
computer technician. This was Jane’s first year of postse-
benefit will also depend on the student’s federal and state
condary education. During 2022, Jane paid $6,000 for
marginal tax rates as well as any federal and state tax
qualified education expenses. Jane and the college meet
credits the student claims. Before deciding, look at the to-
all the requirements for the American opportunity credit.
tal amount of your federal and state tax refunds or taxes
Jane has a dependent child, age 10, who is a qualifying
owed and, if the student is your dependent, the student’s
child for purposes of receiving the earned income credit
tax refunds or taxes owed. For example, if you are the stu-
(EIC) and the child tax credit. Jane's wages are $20,000.
dent and you also claim the EIC, choosing to apply a
Jane withheld no income taxes on these wages and has
scholarship or fellowship grant to nonqualified expenses
no other income or adjustments. Jane was awarded a
by including the amount in your income may benefit you if
$5,500 scholarship. Under the terms of the scholarship, it
the increase to your American opportunity credit is more
may be used to pay tuition and any living expense, includ-
than the decrease to your EIC.
ing rent. Jane paid $10,000 in living expenses in 2022.
If Jane excludes the entire scholarship from income,
Jane will be deemed to have applied the entire scholar- Expenses That Don't Qualify
ship to pay qualified education expenses. The AGI and
Qualified education expenses don't include amounts paid
MAGI would be $20,000. The tax liability before any cred-
for:
its would be $61. The qualified education expenses would
be reduced to $500. Jane would be able to receive a $261 • Insurance;
American opportunity credit ($200 refundable and $61
• Medical expenses (including student health fees);
nonrefundable), a $1,500 additional child tax credit, and a
$3,733 EIC. In total, Jane would be able to receive a tax • Room and board;
refund of $5,433. • Transportation; or
If Jane includes the entire scholarship in income, Jane
will be deemed to have applied the entire scholarship to • Similar personal, living, or family expenses.
pay living expenses. The qualified education expenses This is true even if the amount must be paid to the institu-
would be $6,000, and the AGI and MAGI would be tion as a condition of enrollment or attendance.
$25,500. The tax liability before any credits would be
Chapter 2 American Opportunity Credit Page 17
|