 Income Tax 2022-2023, American Opportunity Credit, who is an eligible student. 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 on the IRS website, irs.gov, irs.gov. 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. Yeah, looking at the income tax formula, we're down here in the credit area at the bottom of the formula. Remembering the first half of the income tax formula is in essence an income statement, although a strange one. The bottom line being the taxable income similar to net income, the bottom line of a normal income statement. We take that taxable income to calculate the tax before credits and other taxes, not with one rate, but with a progressive tax system. We then apply the credits and other taxes like self-employment taxes. We then have the payments and the form of withholdings or estimated tax payments to get to the refund or tax due the bottom line. We also note credits are similar to deductions in that we like them both. But if we can get a dollar credit versus a dollar deduction, we typically want the dollar credit because we get the full benefit of the dollar oftentimes, as opposed to a deduction which only decreases or reduces the taxable income, the benefit being a function of what our tax rate is. Also, the refundable credits breaking them out between the non-refundable credits and the refundable credits, non-refundable credits not taking the tax liability below zero. The refundable credits do making the tax code being used for as a welfare program or benefit program in that instance as opposed to basically taxes by that point. Who is an eligible student to claim the American Opportunity Credit? The student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all the following conditions. Note we're talking here specifically about the American Opportunity Credit, which is going to be the one that usually offers a bigger benefit but is more restrictive than the Lifetime Learning Credit. Therefore, if you don't qualify for the American Opportunity Credit, then you can default and see if you still qualify for the Lifetime Learning Credit. We'll talk about it more specifically in detail in future presentations. First one, the student didn't have expenses that were used to figure an American Opportunity Credit in any for earlier tax years. So that's for the student which could be claiming the credit on their parents' return as a dependent, for example, or possibly on their own return if they're not a dependent or some combination of the two within the four-year period. Meaning they might have been on their parents' return as a dependent or something like that and then filed their own return. No matter where the credit was claimed, it's tied to that student's expenses and you only have the four years to be claiming the American Opportunity Credit after which time you might be able to default to the Lifetime Learning. The second one looks similar but is different. The student hadn't completed the first four years of post-secondary education, generally freshman, sophomore, junior, and senior years of college before 2022. So when we think about college traditionally, we kind of pack it into that four-year timeframe of freshman, sophomore, junior, and senior years. But in practice, obviously many people might take longer times than that because you would think that would be like a full-time student type of scenario. Or sometimes in some cases people might do it in the shorter timeframe and you've got some kind of schools that are more vocational in structure that might not fit as neatly into this kind of threshold or scenario. But you've got to talk to the college in terms of what that means with regards to any particular institution because once you're past that threshold, then you would think that you're in something that's going to be like a master's or something like that, in which case it may not qualify for the American Opportunity Credit would be the general idea. But you could be in a situation, for example, where you're in like you took six years or something to complete the freshman, sophomore, junior and senior years because you're working or something like that and possibly you didn't take the credit for some prior year maybe because you got money from that was from grant money or something like that. You got you got tax benefit money through work or something like that. And therefore you hadn't done number one here and that you hadn't used your expenses for four years up even though you've been going to school to some degree for six years and you have not yet finished the freshman, sophomore, junior and senior years and you would still possibly be able to to claim the American Opportunity Credit and that situation. All right, so next one for at least one academic period beginning in 2022 or the first three months of 2023 if the qualified expenses were paid in 2022 the student was enrolled at least half time in a program leading to a degree certificate or other recognized educational credential. Let's break that one down for at least one academic period. So when we think about the academic periods usually, you know, that's going to be a trimester, semester or something like that. You've got to talk to the finance to the school to see what their academic periods are. They're going to have to line up to this language to some degree in order to be in compliance with these kind of things. Although there could be some variance there beginning in 2022. So in the tax year 2022 or the first three months of 2023 if the qualified expenses were paid in 2022. Why? Because we have that cutoff situation. You might have paid for it in 2022 for courses that don't start till 2023. So you've got that three month timeframe in that situation. The student was enrolled at least half time. So there's another key term that you're going to have to most likely talk to the institution, educational institution to say, what does half time mean to you in terms of the number of courses that need to be taken to be picking that up in a program leading to a degree certificate or other recognized educational credential. Usually that's what you're doing there at the school, getting some kind of degree or certificate. But you want to make sure that that is going to be fulfilled as well in terms of the purpose of the school. You're working towards that. All right, next one. The student hadn't been convicted of any felony, any federal or state felony for purposes of distributing a controlled substance as of the end of 2022. They kind of threw that one in there. It's kind of a random one, but there it is. All right, let's break them down. Completion of first four years. A student has completed the first four years of post second ed education. If the institution at which the student is enrolled awards the student four years of academic credit at that institution. Of course, work completed by the student before 2022. This student generally wouldn't be an eligible student for the purposes of the American opportunity credit. Now, for some schools, it's going to be structured. That's the way the school is traditionally structured in a college type of situation. Other schools might not be as formally structured in that kind of way, but they're going to have to comply to some degree to that structure because that's how the whole educational kind of system is basically set up. So you want to be talking to the institution if there's like confusion on exactly what that means with regards to that particular institution. So exception, any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed four years of post secondary education. So you could have some situations where they basically just based on their academics have have basically cleared a year or something like that. And you would think then that might limit their ability to take the credit versus other people because they're excelling and that shouldn't shouldn't be a detriment to be excelling, you would think. So you have an exception there, the general idea. But I think most people most likely are in a situation where it might take them longer because they're they're working part time or something like that. But in any case and rolled at least half time. So what does it mean to be enrolled at least half time? So a student was enrolled at least half time if the student was taking at least half the normal full time workload for his or her course of study. Now what does that mean? It is once again defined by the institution generally in terms of what it means to be a full time and half time. So so you can have to talk to the institution oftentimes the education, the college or whatever to to make sure you're in compliance with that. The students, the standard for what is half of the normal full time workload is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the US Department of Education under Higher Education Act of 1965 example. So Mac graduated from high school in June 2021 in September. Mac enrolled in an undergraduate degree program at College U and attended full time for both the 2021 fall and 2022 spring semesters for the 2022 fall semester. Mac was enrolled less than half time because Mac was enrolled in an undergraduate degree program on at least a half time basis for at least one academic period that began in 2021 and at least one academic period that began in 2022. Mac is an eligible student for tax years 2021 and 2022, including the 2022 fall semester when Mac enrolled at at College U on less than a half time basis. All right, example number two, after taking classes at College V, a part time basis for a few years, Shelley became a full time student for the 2022 spring semester. College V classified Shelley as a second semester senior fourth year for the 2022 spring semester. And as a first year semester graduate student fifth year for now graduate students so after the fourth year of the traditional four year frame according to the school now fifth year for 2022 fall semester. So because College V didn't classify Shelley as having completed the first four years of post secondary education as of the beginning of 2022, Shelley is an eligible student for tax year 2022. Therefore, the qualified education expenses paid for the 2022 spring semester education for the semester and the 2022 fall semester are taken into account in figuring the American opportunity for 2022. Example three, during the 2021 fall semester Larry was a high school student who took classes on a half time basis at College X. Larry wasn't enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. So because Larry wasn't enrolled in a degree program at College X during 2021, Larry wasn't an eligible student for the tax year. So in other words he's taken a class possibly just to take the class but it's not going towards a degree or something like that is I believe the general idea. So example number four, the facts are the same as in example three, during 2022 spring semester Larry again attended College X. But not as a part of a degree program Larry graduated from high school out in June 2022. So for the 2022 fall semester Larry enrolled as a full time student in College X as part of a degree program and College X awarded Larry credit for the prior coursework at College X. Because Larry was enrolled in a degree program at College X for the 2022 fall term on at least a half time basis, Larry is an eligible student for all tax year 2022. Therefore the qualified education expenses paid for classes taken at College X during both the 2022 spring semester during which Larry wasn't enrolled in a degree program. And the 2022 fall semester are taken into account in figuring any American opportunity credit. Example five, D graduated from high school in June 2021. In January 2022 D enrolled in a one year post secondary certificate program on a full time basis to obtain certificate as a travel agent. So D completed the program in December 2022 and was awarded a certificate in January 2023 D enrolled in a one year post secondary certificate program on a full time basis to attain a certificate as a computer programmer. So D is an eligible student for both tax years 2022 and 2023 because the degree requirement, the work, the workload requirement and the year of study requirement for those years have been met. All right, let's take a look at a flow chart. Those are always great here. Who is an eligible student for the American opportunity credit. So we got our little questionnaire flow chart that you can picture in your mind when these questions come up. So first, did the student complete the first four years of post secondary education before beginning before the beginning of the tax year. This is for the American opportunity credit, not the lifetime learning credit, which if you don't qualify for this one, you might be able to default to that one. So if the question is no, we move on. If yes, the student isn't an eligible student here, but maybe lifetime learning credit. So we're going to say no. Next one was the American opportunity credit claimed in at least four prior years for this student. So did they claim it for that particular student? I don't care where you claimed it was it claimed on your parents return on their return or whatever, but it was tied to that particular student. If the answer is yes, then no for the American opportunity, but possibly lifetime learning. If the answer is no, we move on. Was the student enrolled at least half time in a program leading to a degree certificate or other recognized educational credential for at least one academic period beginning in 2022 or the first three months of 2023 after qualified expenses were paid in 2022. So then if yes to that one, we finally go to the last item is the student free of any federal or state felony convictions for possessing or distributing a controlled substance as of the end of tax year 2000 of the tax year. We don't want you guys on the college campuses, you mess up all the college trying to learn over here. You guys are over here selling drugs and then taking tax credits for it's ridiculous. So you have to pass that you can't do that can't be on that one. So then so so if you say yes is is the student free. Are you free of any felony conditions if the answer is yes, the student is an eligible student and then you can move from there to calculate the credit which we'll talk about in future presentations.