 Hello and welcome to the session in which we will discuss the education credits. It's very important to understand the purpose of the credit in order to put the credit into a context. The purpose of the education credit is to encourage individual to attend higher education institution universities and colleges. How? Well if you attend and you pay your tuition the government would help with that tuition. They will provide you some tax credits. We have two education tax credits that we need to be familiar with. The first one is called the American Opportunity Credit. I'm going to be abbreviating this as AOC. Now you might know it as Hope Scholarship Credit in the past but that's no longer used this term and we have the Lifetime Learning Credit. Both credits are available for qualified tuition and related expenses. So the credits are available if you pay any tuition and any related fees to the tuition itself. How about books and supplies? Well books and other course material are eligible for the American Opportunity Credit but not for the Lifetime Credit because when you attend colleges you're going to have to pay tuition and related fees and you're going to have to buy books and material. Well as we mentioned tuition you are covered. Those are considered not covered. Covered means qualified expenses. However books and material related to your courses are covered are considered qualified expenses under the American Opportunity Credit. You also have to live. You might live on campus. You might live at home which is room and board. Room and board are not eligible for both credits. Why? Because regardless whether you are attending college or not you're going to have to pay for your room and board. Expenses paid by a dependent or treated as they are paid by the parent and this is a summary of the qualifying expenditure. Notice that tuition and fees they qualify under AOC qualify under Lifetime Learning Credit. Course and material AOC yes not Lifetime Learning Credit. Room and board they don't qualify. They don't qualify and remember most likely if you're a college students taking this course now you might be saying I'm not familiar with those credits and I'm a student. Well yes because if you are a dependent of your parents your parents are claiming those credits. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. Let's start by looking at the American Opportunity Credit. Let's first take a look at the maximum amount of the credit. The maximum amount of the credit is 2,500 per eligible student so you could have more than one student per year for the first four years of post-secondary education. Simply put this American Opportunity Credit is designed to help you to do what? Graduate, get done with school, finish your education. That's why it's the first four years in college post-secondary it means after high school. How is the 2,500 computed? Well here's what's going to happen. Whatever you paid they're going to take the first 2,000 dollar of your qualified expenditure multiplied by 100% so you're going to get the first 2,000 back, not get the first 2,000 back, they're going to give you a credit for the first 2,000 in the second 2,000 dollar they'll give you a credit of 25% of it together 2,000 plus 500 you will get a credit of 2,500 so this is the maximum credit per student per year for example a parent could have two students one as a junior and the other one as a sophomore or one as a junior and one as a senior a freshman and a sophomore. Guess what? For each students they will get assuming they paid 4,000 dollar in expenses and I mean 4,000 means the first 2,000 get you 2,000 the second 2,000 get you 500 for each students they will get 2,500 okay qualified expenses as we said tuition and fees course and material for the course you have to be at least halftime students you cannot be a convicted felon and there are always limitations so not all parents would qualify and those limitations are subject to phase out from year to year at the end of this recording I will work an example with a phase out but basically single you start at 80,000 and you would start to lose your credit up to 90,000 merit felon journey they're a little bit more generous start at 160 and ends up at 180 again those phase out are subject to change so if you're looking at this recording in some other year and you see that hold on a second those figures the 80,000 to 90,000 are not correct well yes because they might change them but the concept will stay the same now you have to know also that the AOC is partially refundable just know that it's partially refundable otherwise it's non refundable what is non refundable it means you will get they will offset your taxes but they don't give you a check for the remainder of the credit if it's refundable you would reduce your taxes down to zero and anything extra remaining of that credit they will cut you a check so let's take a look at an AOC credit American Opportunity Credit Homer and Marsh paid 2800 qualified tuition and related expenses for their son Bart who's a senior in college expenses included 600 for supplies and material now so we're saying inside this 2800 we have 600 supplies and material the supplies and material qualify for the AOC and the answer is yes so how much did we pay well we paid 2800 how do we compute the credit well the first 2000 we're gonna get the full $2000 plus the remainder the second 2000 which is only 800 but the second 2000 you'll only get 25% of it so 25% of 800 is 2000 therefore the maximum credit is 2200 and here we are ignoring the phase out we are not assuming any income for Homer and Marsh so and this is ignoring any phase out we're gonna look at a phase out example later now let's take a look at the lifetime learning credit or LLC what is the purpose of this LLC so why do we have two different credits as I told you the AOC the American Opportunity Credit is to help you graduate the first four year in college they want to encourage parents to send their kids to college they want to encourage kids to attend college why because if you attend college you are a more productive member of the society however as a government we want to help you so that's why they have the AOC so what happened after you graduate because if this AOC credit if this credit is for your graduation what happened if you want to earn a post-graduate degree go to graduate school go to law school go to medical school or just take courses to improve your job skills or you want to change career well there's something else called lifetime learning opportunity so this means it's this credit is available lifetime after graduation so the purpose is the post undergraduate education remember because the first one is the first four years what is the maximum amount you can get well the lifetime learning credit per taxpayer so it can be taken per taxpayer is 20 up to the first 10 000 of your qualified expenses remember the qualified expenses can only be here tuition qualified tuition so let's assume you paid 5000 in in qualified tuition you'll get you'll get a credit of 20 which is a thousand if you paid 15 000 well guess what you're only they will stop they will say 10 000 times 20 percent you'll get the maximum of 2000 you cannot be claimed in the same year as the AOC credit is claimed so the same student now be listen to me carefully the same students cannot claim the AOC and LLC in the same time and we'll work we'll work an example about this this lifetime credit is per taxpayer only one student per year so if you have a parent and they are claiming this credit they could only claim one lifetime credit per their dependent usually the lifetime credit you're not really a dependent generally speaking but if you if you are claiming it you can only claim one lifetime credit now a parent's could have two students one person that could qualify for the LLC and another person for the AOC that is okay that that doesn't usually happen but that's if that happens what could happen and if it does happen that's fine but the same students cannot have the LLC and the AOC at the same time that's the point and remember you could have multiple AOC credit so parents could have two kids with AOC and one kid with LLC that's also fine but only one LLC lifetime learning credit again that usually does not happen people that claim LLC they are not dependent but just you need to know the rules do we have limitations of course it's subject to change sub the limitation is subject to change and limitation it's on the screen in front of you starting at 80 000 up to 190 let's take a look at an example for lifetime education credit Samantha paid 3200 to attend the class at local university to help improve with her job skills how much of the lifetime credit can she claim before the phase out well if she paid 3200 times 20 that's 640 let's take a look at this example where to see how the both credits cannot apply for the same year for the same student let's assume Patrick paid 8 000 dollar of tuition for Maria his daughter to attend the state university during her first year Patrick AGI is 68 000 so we're not subject to any limitation compute the credit well first we're gonna compute since Maria is a freshman first year in college we're gonna we're gonna compute the AOC well Patrick paid 8 000 of this the first 2000 we're gonna get 100% tax credit for that and the second 2000 we're gonna get 25% credit so if we compute the credit Patrick will get the maximum credit of 2500 so remember of the 8 000 we used up 4000 we still have $4 000 that we have not used how about we claim the lifetime credit 20% for Maria and the answer is you cannot do that you cannot do that you cannot claim the lifetime credit and the AOC for the same students now let's assume Patrick had another kid and Patrick paid $4 000 for that other kid as and that other kid is only qualified for the lifetime then yes we can get the 20% but not for Maria we cannot do that different students yes same students no let's take a look at a phase out example Samantha and Joseph married following jointly paid 2600 of tuition and 504 books for their dependent daughter to attend state university as a freshman so since this is a freshman student first year in college we are dealing with American opportunity credit they paid 2600 in tuition and 500 in books our books qualify and the answer is yes for the AOC so let's assume the couple AGI is 80 000 well if the couple AGI is 80 000 the phase out don't start until 180 what does that mean it means there is no limitation really the first 2000 that they paid they're gonna get 2000 credit for that and the next 2000 which is they did not pay they paid only 1100 they're gonna get 25% of that which is 275 therefore the total credit is 2275 now let's assume the AGI is 168 000 what does that mean remember the phase out start at 164 married following jointly and it goes from 160 to 180 so there's a 20 000 dollar what we called a range a range so they'll start to lose the credit and once they got to 180 they they're gone so the range we call this the range the range is 20 000 so how do we compute the credit well first of all they are 8 000 above the phase out because the phase out start at 160 they're at 168 well the range is 20 000 because this is married filing jointly now for single the range is 10 000 because it goes from 80 to 90 so the range is 10 000 what do we do well we're gonna say is this they are 8 000 inside the range because again the range this is 0 and this is 20 20 000 this is the range and the range is between 160 and 180 so what we say we say okay let's see how much they are inside the range and as they as they move inside this range they lose the credit they are someplace here they are 40% inside the range this is 8 000 how did i know this because 8 000 divided by 20 000 is 40% what does that mean it means they're gonna compute their credit which is 2275 and they are going to lose 40% out of it they're gonna lose 40% well what does that mean it means they're gonna be remaining with with 60% so if we take 2275 minus 910 the credit becomes 1365 1365 so as they move inside this range they would lose credit they're only lost 40% of that credit obviously once their income is above 180 once they get to 180 they will get zero and starting going forward they will get zero so if the AGI is 184 what's their AOC zero they're outside the credit they don't get anything but this is how you compute the phase out and same concept work for the lifetime learning credit and remember if it's single if it's not made it financially the range is 10 000 so remember when you take what's how much are they inside the range for example if this was individual will take 8 000 divided by 10 000 and it will be there will be 80 percent inside the range but this the you know this AGI will not work because the range is only 80 to 90 000 but the point is let's assume they're at 88 000 so there will be 80 percent inside the range so it's just so you know the range will change what should you do now to learn about this go to far hat lectures whether you are an accounting student cpa candidate an enrolled agent and look at additional mcqs through folds lectures that's going to help you understand the tax credit an important topic on the cpa exam american opportunity credit lifetime credit important concept good luck study hard and of course stay