AOTC - My son is starting college & if he pays partial fees say $2500, will he get all of it back as credit? will only get the credit for the little tax he might own.

[akkina9]

I am not planning to file him as my dependent and he will be filing his own taxes for 2024. He got some scholarships excluding that the fees, boarding etc will cost like 30K per year. So I plan to help him out but he can pay most of what he is earning towards this so that he could get tax credit.

For example:
He pays $2500 of the fees from his pocket and when he files the taxes, will he get $2500 in credit in both the cases?
1. When he owes IRS says $500. Will he get back $2000 Refund?
2. If IRS owes him $500. Will he get back $3000 Refund?

[Bsch4477]

If you are eligible for the American Opportunity Credit you should claim your son and get the credit yourself. Only you can receive the refundable portion of the credit. The qualified education expenses are what both you and your son spent. It doesn’t matter who paid them. 

[VolvoGirl]

Why won't you be claiming him as a dependent?  If he is under 24 and a full time student you can claim him no matter how much he makes.  And even if he doesn't live with you.  Away at school is a temporary absence and counts as living with you.  

In fact even if you don't claim him, he still has to say on his return that he CAN be claimed on someone else's return.  

[NCperson · Accepted solution]

@akkina9 if you don't claim your son (which is your right) and if your son meets these three conditions, he is INELGIBLE for the refundable portion of AOTC and would have to qualify for AOTC as a non-refundable credit only.

1) he is under 24 and provides less than 1/2 his support AND

2) he files other than Married- Filing Joint AND

3) at least one of his parents is alive. 

from what you stated, he probably meets these three conditions....

to capture the $2500 as a non-refundable credit, Line 22 of form 1040 would have to be greater than $2500 (which means his income would need to be in the $38,000 range.)

His Qualified Education Expenses (box 1) of form 1098-T would have to exceed his scholarships (box 5) by at least $4,000.  Qualified expenses are needed for college: tuition, books, computer, etc.  Room and Board, activity fees, etc. are NOT Qualified expenses and are ineligile for AOTC.

if you claim him and your income exceeds $90,000 ($180,000 joint), you are not eligible for AOTC.  

to specifically answer your questions 1) and 2).  the answer to both are "NO".  You are describing 'refundable credits' and he is ineligible for those. 

make sense? 

[akkina9]

Forgot to mention that I am not eligible as we make more than the income threshold.

[akkina9]

Regading claiming him as dependant - My understanding is I get child tax credit only if the child is under 17. So I am assuming there is no real benefit for me file him as a dependant, when he could file for himself and could benefit from AOTC.

[akkina9]

@NCperson 

Thanks for the detailed answer. You are correct about my son meets all 3 conditions you stated. I read the following "The American Opportunity Tax Credit is a tax credit to help pay for education expenses paid for the first four years of education completed after high school. You can get a maximum annual credit of $2,500 per eligible student and 40% or $1,000 could be refunded if you owe no tax. This credit is subject to income limitations."

My son will probably make like 8K to 10K this year, so sounds like even he he pays all of what he earned to college fees, he is not going to benefit from tax point of view or can he get like $1000.

In general does it make sense for me to claim him as dependant (not sure if I will get any benefit) and he will file taxes as he is earning. Or there are any advantages for him if I am not claiming him as dependent.

Also I am thinking if it makes sense for my son to put all his money in Roth IRA instead of paying as he pays very little tax now as I can help him with 100% expenses for his college. 

Thanks for your time

[Hal_Al · Accepted solution]

Q. Can he get like $1000?

A. No. As others have said, he is ineligible for ANY of the refundable portion of the AOTC.

Q. In general does it make sense for me to claim him as dependent (not sure if I will get any benefit) and he will file taxes as he is earning?

A. Yes. Dependent children over age 16 are eligible for the $500 "Other Dependent Credit", instead of the Child Tax Credit. 

Q.  Or there are any advantages for him if I am not claiming him as dependent.

A. No. 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, he only qualifies for an education credit or deduction, if he is not a dependent*.

Q. Also I am thinking if it makes sense for my son to put all his money in Roth IRA? 

A. Yes, put the maximum amount allowed in a Roth IRA ($7000 for 2024). His IRA contribution is further limited to his compensation (earned income).

Q. Also I am thinking if it makes sense for my son to put all his money in Roth IRA instead of paying tuition?

A. He can do both.  A special tax rule allows the education credit to go to whoever claims it, regardless of who actually paid it.  The student can claim the credit even if his parents paid the tuition.  Different rules apply to tuition paid by scholarship. 

*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. He cannot be supporting himself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit, if eligible.  
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).  A student with $8000 - $10,000 of income will not have a tax liability. 

[NCperson · Accepted solution]

just in case @Hal_Al 's response didn't cover the questions/ issues: 

<<My understanding is I get child tax credit only if the child is under 17.>>

correct, but when you claim him, you are eligible for up to a $500 "other dependent" tax credit. 

<<when he could file for himself and could benefit from AOTC.>>

yeah, but, at his income level, and the fact that he passes the 3 test questions I posted above, it is unlikely to be any AOTC benefit for him.  His income would have to exceed $14,600 for the FIRST dollar of tax benefit to occur. 

IMHO:  Congress was smart:  AOTC is really targeted at parents - and they didn't want parents who earned more than $90,000 (single) / $180,000 (joint) to circumvent that rule by not claiming their child.  So they instituted those 3 rules as part of the law that I posted above which probably covers 95% of college age students - making THEM ineligible as well! 

the best think to do is you claim him; he files a tax return for his income (checking the box that he CAN be claimed by someone else, which he has to do even if you decide not to claim him) and let the chips fall where they may in regard to tax credits. 

[akkina9]

@NCperson @Hal_Al Thanks for the detailed responses. With your suggestions, the following is what I am planning do with couple of follow up questions 🙂

1) Will claim him as dependent so that I could get $500 credit. I assume it does not have any income limits.

2) Also ask my son to file his taxes and check the box which says someone else could claim him as a dependant.

Regarding this: "A special tax rule allows the education credit to go to whoever claims it, regardless of who actually paid it.  The student can claim the credit even if his parents paid the tuition.  Different rules apply to tuition paid by scholarship. "

- I thought I will not be able to claim education credit as its based on my income. If my son claims it and he has no tax liability based on ~8K income, does he get any credit? Approximately 3rd of his Free is covered by the merit scholarship he got from the University.

Regarding "Yes, put the maximum amount allowed in a Roth IRA ($7000 for 2024). His IRA contribution is further limited to his compensation (earned income)."

- He cannot probably put much of it in Roth IRA then? Is there a formule based on earning income how much he can put in Roth IRA?

[Bsch4477]

The credit for other dependents phases out with income over $400,000. 

Your son can’t claim education credit if you claim him and as discussed he can’t get the credit even if you didn’t claim him. 

He can fund his IRA to the extent of his earned income to a maximum of $7,000. 

[akkina9]

Thanks @Bsch4477 . This is my plan of action then. Will file him as dependant (we are cutting close to 400K) and he will file taxes and mention someone else can claim him as dependant. Then ask him to put all his earnings in Roth IRA.

Thanks

[Bsch4477]

Good plan!

[Hal_Al]

@akkina9  said " Then ask him to put all his earnings in Roth IRA."

An IRA contribution is limited to $7000 per year ($8000 if over age 50).  In order to contribute the full $7000, he must have at least $7000 of earned income. So, for examples, if he only earned $5000 from part time jobs, he could only contribute $5000. If he earned $8000 from jobs, he could only contribute $7000. 

Q. - I thought I will not be able to claim education credit as its based on my income. If my son claims it and he has no tax liability based on ~8K income, does he get any credit? 

A. No.