Should the parents claim the American Opportunity Credit or should the student claim it?

[apstndp]

Facts to keep in mind:
- The parents filled out their 2016 taxes already and did not claim their son who is a college student.
- Their son made around 10k in 2016 and would like to try to file his own taxes and see if he can claim the American opportunity credit as he does not want his parents to amend their taxes.

So the main concern is:
- Can he claim the American opportunity credit?
- Another concern that arises is: in this scenario, who will benefit the most as far money refund? The parents claiming their son and the American opportunity credit or their don claim it?

[IreneS · Accepted solution]

If the parents did not claim the son as a dependent, they cannot take the American Opportunity Credit (AOC).  They could (if they chose) amend their return to include their son as a dependent and take the AOL.

Yes, the son can claim the AOC on his return, as long as he takes the personal exemption for himself (indicate that he is not a dependent on someone else's return).

Without more information I can't tell you who would benefit most (although I suspect the parents are in a higher tax bracket and would benefit more).  However, when making that decision, here are some things to consider

• The personal exemption for the son is a $4,050 reduction in taxable income. This may reduce his income down so that he won't get the full benefit of the AOC. 
  

• The AOC is a maximum of $2,500 (100% of the first $2,000 in education expenses; 25% of next $2,000).  If you get the full AOC, 60% ($1,500) is a nonrefundable credit, meaning that the credit will only take his tax bill down to zero.  If his taxable income is around $6,000 ($10k - 4,050), his tax bill would probably be $600, so part of the credit is going to waste.  [He might still get the refundable part of the credit ($1,000). See below for explanation of refundable/nonrefundable credit.]
  

• The income level of the parents.The AOC starts to be phased out at a modified AGI of $160,000-$180,000 for couples filing jointly.  If the parents' joint modified AGI is over $180,000 they would not get the credit.

• Part (40%) of the AOC is a refundable credit.  A non-refundable credit will just take your tax bill down to zero.  If you qualify for a refundable credit and the amount of the credit is larger than the tax you owe, you will receive a refund for the difference.
  
• No cause for concern on the parents' return.
• On the son's return, according to the IRS - American Opportunity Credit: 
  
Refundable Part of Credit

Forty percent of the American opportunity credit is refundable for most taxpayers. However, if you were under age 24 at the end of 2016 and the conditions listed below apply to you, you can't claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only.

You don't qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.

1. You were:

   1. Under age 18 at the end of 2016, or

   2. Age 18 at the end of 2016 and your earned income (defined below) was less than one-half of your support (defined below), or

   3. Over age 18 and under age 24 at the end of 2016 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).

2. At least one of your parents was alive at the end of 2016.

3. You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2016.

After all that…..

·   If the parents make $180,000, let the son take the exemption and whatever AOC credit he can.

·    If the parents make under $160,000 (the beginning of the phaseout) then calculate both their amended return and the son’s return to see the net benefit.

[apstndp]

big thanks to you TurboTaxIrene!!! 😉

[apstndp]

TurboTaxIrene, just by reading your well-explanatory answer, I think the parents will benefit the most.

[apstndp]

With regards this rule below: what about if only item one DOES NOT applies to the son but the rest of the items 2 & 3 do? Would he not qualified for the refundable part as only ITEM 1 does not applies to him?

You don't qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.

    You were:

        Under age 18 at the end of 2016, or

        Age 18 at the end of 2016 and your earned income (defined below) was less than one-half of your support (defined below), or

        Over age 18 and under age 24 at the end of 2016 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).

    At least one of your parents was alive at the end of 2016.

    You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2016.