Q. Does the tax loophole work here to claim up to 4000 of box 5 as income?
A. Yes.
Q. Would that mean that he claim 56730 as income?
A. No, he would claim $30,019 (86,749 - 60,730 = 26,019 + 4,000 = 30,019) as income, reduced by any additional books and/or computer expense. This is the strategy for you to claim him and get the AOTC credit?
Q. What strategy is there for him to be able to claim the AOCT credit?
A. For you to not claim him as a dependent. See full explanation below*. A rough look at the numbers says this strategy doesn't work. It's about $1900 for him vs. $3000 (2500 AOTC + 500 ODC) for you.
Q. Should/can he file as an independent?
A. No. The best he can do is file as a person who CAN be claimed as a dependent but isn't actually claimed.
Q. Is there any benefit for him to be able to file independent?
A. No. He would still not be eligible for the refundable portion of the AOTC. The kiddie tax would still apply. Those are based on age and support, not dependency.
With the tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, you only qualify for an education credit or deduction, if you are not a dependent. But, the question is academic, he isn't allowed to file independent.
*While 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 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)
