AOC credit prompted again.... but does student actually qualify?

[PTN2021]

Hi.

 Thank you for your help. Does my daughter pass the support test if she is paying for living expenses( actual expense cost)  beyond  the COA outlined by  and qualified expenses for 529. She has a 1099-Q ( $32,200)  which covers the qualified expenses. But the actual expense cost is $46,000 due to the additional difference in  rent ($14,000) not covered by 529.  She paid   the difference in ( rent ) out of her paid job. Does she qualify  for the education credit if we don't claim her? Her earned income was around $24,310. I don't understand how the AOC is calculated to consider parental support and student support. There are other expenses beyond the qualified expense other than the rent,  but I'm just presenting the big items. Last year, turbo tax also prompted the credit but it wan't taken bc I thougtht I entered something wrong to prompt this.  This year, again Turbo tax prompted the credit ( a good refund), so I wanted to ask for direction. Thanks in advance

[DaveF1006]

Yes, your daughter can qualify for the American Opportunity Credit (AOC) on her own return if she provides more than half of her own support, and you do not claim her as a dependent. The key is the support test, and the fact that 529 plan distributions do NOT count as support she provides for herself.

The  AOC is calculated independent of parental support or student support. The support test is strictly used to determine whether or not you claim her on your return or if she can claim herself on her own return.

[Hal_Al]

Q.  AOC credit prompted again.... but does student actually qualify?

A. Yes, she qualifies for some AOC*, if you don't claim her, but not the full $2500 and most likely none of the refundable portion. Earned income of $24,310 would get her enough to wipe out her tax liability (I quick estimate about $850)

Q. Last year, turbo tax also prompted the credit but it wasn't taken bc I thought I entered something wrong to prompt this.  This year, again Turbo tax prompted the credit ( a good refund).  Have I answered something wrong?

A. Probably. Most likely the question, did  her earned income provide more than half her support.  

The $32,200 from the 529 plan is considered parental support, since the parent is the owner of the plan.  Since that, alone, is more than $24,310, she couldn't have provided  more than half her support with her earned income.  I assume she is under 24. 

*Technically there is a provision that allows your student-dependent to claim a federal tuition credit. From a practical matter it seldom works out.  A full time student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  
If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)

[PTN2021]

Hello ,

Thank you for the reply.  Since 529 is owned by me ( despite  the 1099-Q is in her name), does it mean I supported $32,000 of the $46,000 actual cost  (roughly 70%) and her contribution is 30% which shows she does not provide more than half her own support?  Does base on this line of thought, it shows she does not provide more than half her own support?

That's where the calculation confuses me. 

Thanks

[Hal_Al]

Q. Does it mean I supported $32,000 of the $46,000 actual cost  (roughly 70%) and her contribution is 30% which shows she does not provide more than half her own support? Based on this line of thought, does it shows she does not provide more than half her own support?

A. Yes. 

[PTN2021]

Thank you Hal for your response. So I should answer the following prompts :

  1. She does not pay for more than 1/2 support

  2. I don't claim her as a dependent on my return

  Just curious as I like to understand more how the math works. So if the actual cost is $46,000 and 1/2 of that is  $23,000, she still does not pass the support test with her income of $24310? I guess if that was the case, there  would be excess 529 distribution  ( 1099-Q was $32,200)?

Last year was the similar case and  I didn't apply the credit due to lack of understanding.  This year since it came up again, I'm seeking help from this community to confidently enter the correct data.

Thanks again

[Hal_Al]

Q.   Just curious as I like to understand more how the math works. So if the actual cost is $46,000 and 1/2 of that is  $23,000, she still does not pass the support test with her income of $24310? 

Very good question!  The actual rule (for the refundable portion of the AOC) is "her earned income was more than half her support". Note that it doesn't actually say that she spent her earned income on support, only that she had that much earned income.

But there are two other issues:

1. For the dependent test, she did need to actually pay for half her support.

2. What constitutes support.  I took the $46,000 to be only the cost of educational expenses, including off campus housing.  Non educational items would also be support, including clothing, transportation, entertainment, personal expenses,  food and lodging during school breaks. Since she is only "temporarily away" at school, the support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

The IRS has a worksheet that can be used to help with the support calculation. See: https://sites.allegheny.edu/human-resources//files/2019/05/IRS-Worksheet-for-Dependent-Tax-Status.pd...

Q. I guess if that was the case, there  would be excess 529 distribution  ( 1099-Q was $32,200)?

A. We're not there yet, but no. Saying her income went to support, for purposes of the AOC and dependent support tests, does not make any part of the 529 distribution non qualified. 

For the distribution to be qualified, there only has "to be" qualified expenses that were not allocated to tax free scholarship or the tuition credit. 

[PTN2021]

Hello,

  I went back to make the correction as you advised, but the turbo tax is not updating my change that she is not supporting more than half expense. The refundable credit is still there.  Form 8615 has an exclamation  and  I tried to answer" Yes" to  the question  "was the child a full time student19-23 with unearned income more than $2700 AND their earned income did not exceed 1/2 of their support" . BUT it would not change.. 

I went through the personal question again to answer the questions but it doenst' seem turbo tax is responding to my new entries.  It's showing she is getting the refundable credit which is more ( despiste the change I made that she is not supporting more than 1/2 support."

Any guidance, short of redoing the entire tax again?

Thanks 

[Hal_Al]

Ouch!

I'm afraid I can't help with that.  You may need technical support.  I also don't know why form 8615 got introduced, you hadn't previously mentioned her having unearned income. If a portion of the 1099-Q earnings is taxable, that would be unearned income. 

[PTN2021]

Hello Hal,

 I checked the  personal worksheet form and there is the check for the box that says earned income does not exceed 1/2 of support. So the form shows the correction. But the calculation for the AOC credit shows refundable and reflect a higher credit.  Should it be nonrefundable since she does not pass the support test?

I don't know what is correct now 

Thank you

[Hal_Al]

Q.   Should it be nonrefundable since she does not pass the support test?

A. Yes.

Check her birthdate (not over 23) and that you checked fulltime student. Non full time students, but are half time or more,  are eligible for the refundable credit. 

You can make entries on the worksheets with desktop software, but not online.