Is newly independent working son eligible for the American Opportunity Credit for partial year education expense prior to graduating

[Matilda]

My son completed his bachelors degree in March 2017.  This was two additional quarters on top of the normal 4 year plan so his 2017 expenses were in his 5th year of college.  Due to income level, we were unable to use the American Opportunity Credit while he was our dependent the first four years.  Now that he is no longer our dependent and is working on his own, he appears to qualify since we never used the credit.   I just want to make sure he can use AOC since the 3 months of education were in his 5th year (but still for bachelors degree).  Also, he used money from his 529 fund to pay for expenses.  Thank you.

[Hal_Al · Accepted solution]

Simple answer yes. Since you did not use all 4 of the times he is allowed to claim that credit, he can still use it since this was his last year of undergraduate education. The 3 months is not a limitation, as long as he was at least half time. It is also assumed he supported himself by working, in 2017, or was over age 23.

There will have to be some coordination between the AOC and the 529 plan best explained by example. 

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q*

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360) 

*If the 1099-Q was in your name, rather than the student's name. The math is still the same; it's just that the $240 (in the example) would  go on your return, instead of his. 

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 

The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.

[Matilda]

Thank You.  It appears turbotax calculates this for him.  When he takes the AOC, he is left with some income from the 1099Q even though his expenses match his 1099Q.  It is still well worth taking the credit.

[KrisD]

The requirements he DOES meet is that he has not used the credit 4 times (since you had never used the credit while claiming him) and although he has gone to college for the 5th year, he is still in the 4th year of the academic years of the degree (senior). He cannot base the credit on expenses that he applies to the tax-free assistance (distribution from 529).

Please click the link below for more information:

CLICK HERE for IRS Pub 970 Education Credits