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