Education Credit Amount

[ABice]

TurboTax says that my biggest credit is in the form of a tuition deduction wor th$4,000. I am confused as to how that benefits the dollar amount I will receive in my refund? My sister who qualified for the American Opportunity Education credit received a whole $2,500 from the credit according to TurboTax. I am confused as to why TurboTax reports my value as $4,000 but my total refund isn't even $1,000? I'm a 20 y/o junior in undergrad.

[Hal_Al]

20 y,o. undergrads, who do not support themselves with earned income are not eligible for the (up to) $1000 refundable portion (not $2500) of the American Opportunity (AOC) credit. The $4000 Tuition & Fees deduction (TFD) must have been all that was needed to get your income tax to zero.  In that case, it's better than the credit because it transfers to the state return, as well.

[ABice]

Thank you, that makes a bit more sense. My sister (who was able to claim the $2,500 as part of her refund) is completely independent from my parents as she is 25 and financially independent as well - which sounds like that was the major difference between our tax refund amounts.

[jzzenner]

Hello - my son is in the same situation as this person, he's 20 in his 2nd year of collage, worked this summer making under $4000 and wants to qualify for the $1,000 credit. Since he does not pay for school from his earned income, he does not qualify? Is that correct?

[Hal_Al]

@jzzenner - Yes, that is essentially correct, but not exactly.** 

A 20 y.o., in his 2nd year of collage, who worked this summer making under $4000, surely still qualifies as your dependent.  You should be claiming the full $2500 credit, not just the $1000 refundable portion.

**There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit if if the majority of his support comes from his own earned income. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. You must have actually paid tuition, not had it paid by scholarships & grants.  It is usually best if the parent claims that credit. 

You cannot claim a credit if you are, or can be, claimed as a dependent by someone else.

[ThomasM125]

He may qualify for an education credit, regardless of how the education expenses were paid. He would not qualify for the education deduction if his income was not sufficient to allow for it.

Also, if your son qualifies as your dependent, then you would actually get the credit on your tax return.

[jzzenner]

Turbo Tax took the $4,000 deduction making his taxable income $0, which allowed him to get a refund of $385 for his fed tax deposits. However the $1000 tax credit which he qualifies for would have been a better choice. The program shows his American Opp Credit is $0 even though he qualifies.

He is not a dependant of our anymore and he meets all the other qualifications. that is why I am confused.

[Hal_Al]

Even though he is not your dependent,* he still does NOT qualify for the AOC, because of the earned income rule. He does NOT "meet all the other qualifications". The Earned income rule is an additional rule for full time students under age 24. 

If he only has $4000 of income, his standard deduction, alone, would reduce his taxable income to 0.  He would not need the education deduction at all. 

*Nothing you have described explains why he does not qualify as your dependent. 

[jzzenner]

That makes more sense. His qualification for residency at his university requires that he can no longer be claimed as a dependant. This is why we can no longer claim the credit for ourselves. In the end, the residency rate at the school he attends saves us far more than the credit would have.

Thanks for your help clarifying this!

[jzzenner]

That is all correct, he did not need the additional education deduction, but turbo tax added it in anyway. If he doesn't qualify under the earned income rule because his tuition was paid for by a 529 fund, then that probably excludes a lot of students.