American Opportunity Credit - Support Test

[shawnhopkins]

I'm helping a student determine if they provided more than one-half their support. Here is their situation:
1. Fulltime student in Fall 2024

2. Student loans totaling $2,722

3. Books, Supplies, and Computer necessary for registration and online coursework 

4. Between the loans and necessary expenses the total caps at $4,000

5. Her parents are not claiming her as a dependent

She does have a job and I believe she earned around $6,000 last year, I don't have the total.

She lives at home and the only dedicate space is her bed as her room is location in the basement where the washer and dryer are location. All other space in the house is either shared by a total of 6 people or dedicated to the other members.

The parents only paid for her TEAS test which was a required expense. I gifted the computer and books.

She does not pay rent but I figured her FMV rent, if she did pay rent, would be $320/month based on her dedicated and shared space and the FMV of the house.

The parents pay the utilities and food and she is under their medical insurance. However she would pay for any medical expenses, clothing, and expenses related to herself.

As close as I can calculate one-half of her support is $3,000 considering it's a shared household, space, utlities, food.

Would she qualify for the refundable portion of the American Opportunity Credit? Non-Refundable doesn't matter since her tax liability will be 0.

Last question - If she does not pass the support test, would it make sense for her parents to claim her, then give her the refundable credit for tuition?

[MindyB]

It depends. Based on the information you gave, it's possible that the student gave half of her support with a $6,000 income, but not likely.  However, that is a determination the taxpayer needs to make.

Here are some additional considerations to your list of expenses:

1. Food alone according to the USDA's thrifty food plan for a female 19 year old is $2,988 a year 

2. Automobile expenses including cost of vehicle, repairs, insurance, registration

3. FMV of rent would likely be more than computed, since utilities aren't included.

4. Did the student earn scholarships? Scholarships are considered support not paid by student.

[shawnhopkins]

Thanks for the quick reply. I listed utilities separate (just didn't include them) but did account for them. She received no scholarships. She pays her own automobile expenses. Car is owned and was gifted in 2023.

Break down for support given by her parents I have as:

Annual Rent: Calculated using .08% of the median FMV price of the home taken from 48 data points (4 companies x 12 months each), taking into consideration her dedicated and shared square footage. Adding in shared amenities (washer/dryer, etc).  Result was $3,814.76. Note that FMV's that were one standard deviation below and above the median resulted in a range of $127,154.85 to 158,845.15, about 56% of the values used (27/48 data points).  Changine the FMV to around $159,000 adds about $200 to 50% of the support at the end.

Food: $1200 - Which is probably understated, but food is shared between the household members

Utilities: $1066 as her share

If I adjust for food that increases 50% of the total from $3040.71 to $3934.71

I'm still waiting on total annual income last year as well. But for the most part trying to figure out if I'm on the right track.

[KrisD15]

Yes, you're on the right track, but I would ask, since you say she was a full-time student in the Fall of 2024, what about the costs for the entire year? 

Was this person a High School Student during the first half of the year? If yes, I would say you would need to add the portion of property tax the parents paid that covered the school tax, or tuition payments the parents made. 

What about clothing? What about the cost of the Health Insurance that the parents supply? 

Additionally, if she saved any money, that would be subtracted from the amount she supplied. In other words, if she took a loan for 2,722 and earned 6,000, that would show 8,722 the student supplied; however, if there is 1,000 of that in their checking account, the student only supplied 7,722. 

You say "Between the loans and necessary expenses the total caps at $4,000", but the loan is NOT an expense, it is part of the student's supplied support. 

In your example, it's hard to assume this student supplied more than half their own support, but it is also possible. 

If the parents (or someone else) supports the student, they should apply for an education credit if applicable. 

You ask "Last question - If she does not pass the support test, would it make sense for her parents to claim her, then give her the refundable credit for tuition?" 

Make sense? It could, but the truth is that if the student does not pass the support test and the parents claim her, resulting in a credit for the parents, it would be a credit for the parents. What they do with the credit would be up to the parents. 

To make things easier, ask yourself, "If the student made twice as much in 2024, would they have been able to survive on their own?" If no, then they probably did not supply more than have their own support in 2024. 

If this is not helpful and/or the student files for the refundable portion of the credit, be sure the student keeps with their tax file the worksheets they used to determine that they supplied more than half of their own support.

IRS support worksheet 

[shawnhopkins]

Thank you for replying!

For 2024:

The worksheet on line 10 states, "Don’t include expenses of maintaining the home, such as mortgage interest, real estate taxes, and insurance"

- She graduated high school in May and began school in September.
- She was 19 at the end of 2024.

So a little confused what to do here, but considering the home has a median price of $143,000 and the local real estate tax is 4 mils, it's probably not going to change anything.

- Her parents provided support in the form of lodging, utilities, and maintained the home all of 2024, bought food for the household, paid the utilities
- The family is on State assisted medical insurance, so not sure there is a cost there, but she pays any copays for 2024.
- The only education expense the parents paid was her TEAS exam which I think was maybe $125.00 in February.
- The family did take her and her brother on a trip to Florida as a graduation present and paid for the plane fare and hotel, and I'm going to have to guess that was maybe $1,500 her share they paid.

- She buys her own clothes, pays her own car insurance, cell phone, fuel

- She owns her car with an FMV of around $13k. Car was a gift in 2023 (not from parents).

--- Her income was $7,159.13
--- She had $1,400 in a savings account at the beginning of the year, the money was gifted in 2023, end of year she had $710 in the account.
--- Her total federal loans were $3,712.00

In looking at the worksheet that would make her personal support $12,271.13

Well best I can calculate would be:

- Total funds belonging to student: $12,271,13

- Support provided by parents:
-- Lodging: $3814.76
-- Food: $3,500 (I increased this)
-- Utilities: $1,183.33 (I increased this from my previous post)
-- Trip and other support: $4,000 (I added this)

Total (50% Support): $6,249.05

[AmyC]

I don't see the education expenses subtracted out for costs of supporting the student. See IRS Worksheet for Determining Support.

Usually, the parents will claim the child and the credit. The student will not receive much education credit, up to $1,000 with no taxable income while the parents may receive up to $2,500. You are doing a very thorough job and understand the situation to know how best to help the student.

[shawnhopkins]

Thank you for the reply. Much appreciated.

The worksheet seems more designed for a parent or relative which makes it difficult to navigate.

I adjusted a few things and labeled expenses. The savings account was $1,400 at the start of the year of gifted funds. She used $805 towards car insurance and replenished the account with $305. Making the balance $895 at the end of the year.

I didn’t know what to do with that or with line 2 and 3 since a lot of this is gifted.

For section 1:

Student Income/Savings/Other

Income: $7159.13

Student Loans: $2722 (Adjusted down from incorrect amount)

Savings: $305 (End of Year) – Balance was actually $945 (Gifted)

---------------------------

Total: $10,186.13

For section 2: Household expenses:

Lodging, Food, Utilities: $7,314.76

Additional expenses, travel and recreation (estimated): $ 4,000

---------------------

Total: $11, 314

For section 3:

--------------------

Share of household expenses: Already split it’s not an even distribution. The minors in the household are given total financial care, and there are two, where as the other members are given lodging, food, and share some recreation. But they pretty much pay their own personal expenses.

Share of Household: $11,314

Her college expenses were gifted and include:

- Books - $418

- Laptop - $1164 (Required for classes)

- School Supplies: $219.47

- Background Check: - $22.00

- Technology Fee: $1000 (Required for enrollment)

There were also $1,395.90 in airline expenses, gifted and not paid for by the parents. I did include those on the worksheet.

Car insurance: $805 (Technically gifted)

Car maintenance: $500 (estimated)

Total Student Expenses: $4719.37

Total income/other: $10,186.13

Total support: $11, 314.14 (50% = $5,657.07)

Total expenses: $4219.37

Total gifts: $4719.37 + $1,400 Savings start of year)

In summary the only thing she paid for last year were the two loans totaling $2,722. All expenses were gifted with the exception of the part provided by her parents. Not sure if that helps. But thanks again for the many replies. Very helpful.

[AmyC · Accepted solution]

She did not support herself. She has wonderful benefactors. If the parents provided the $11k in support, that seems greater than the rest. The student earned less than $5,050 and it looks like the parents could claim the student.

If she claims herself, she will only get the $1,000 refundable credit since she has no taxable income. Her parents could get up to $2,500. There are limitations so that may not be the case. Some areas are more gray than others.

[shawnhopkins]

Thanks for helping me work through this!