America Opportunity Tax question for 3 children in college

[diamondlil213]

I have 3 children in college (2 freshman and 1 senior). Going through the 2 freshman was pretty standard and we received the AOT refund. When I input my 3rd daughter's info, as soon as they ask the 1st question (Is she working towards an associate's, bachelor, or graduate degree) , when I input "yes" (same as for the other 2) it immediately reduces our refund by $1526 dollars.  She has received this the past 3 years, but should be able to receive 1 more year. I just don't understand why it would reduce our refund before asking any other questions. 

[LindaS5247]

Sometimes adding a child to claim the American Opportunity Credit can decrease your refund if that child's own income is added to yours and it pushes you into a higher tax bracket.

If she is over 24, she is ineligible for the refundable portion of the tax credit.

A refundable tax credit reduces your tax liability dollar-for-dollar and can result in a refund of the remaining amount. Nonrefundable credits can only reduce taxes to zero,.

Adding a dependent for the American Opportunity Credit can decrease your refund if it triggers a conflict with other credits (like the Earned Income Tax Credit).

If she is a student under 19 (or under 24 if full-time) and has no income, adding them should not generally decrease your refund.  

Also, make sure to go through the TurboTax screens regarding your daughter and make sure you have answered everything correctly. The following is required to be eligible for the credit:

• The student must be pursuing a degree or recognized credential.
• She must be enrolled at least half-time for at least one academic period.
• She must be within the first four years of post-secondary education.
• She cannot have a felony drug conviction.
• She cannot be claimed if listed as a dependent on another persons return
   

For tax year 2025, this  credit begins to phase out for single taxpayers who have adjusted gross income between $80,000 and $90,000 and joint tax filers when adjusted gross income is between $160,000 and $180,000.

Click here for What Is the American Opportunity Tax Credit?

Please return to Community if you have any additional information or questions and we would be happy to help.

[diamondlil213]

Thank you so much for your response. My daughter is 21 and a full time student. We did not add any of her income to ours to change our bracket.  The thing I find most confusing is that TT instantly reduced our refund by $1526 when I said she was pursuing a bachelor's degree (1st question they ask)

 Then it did give us the $2500 AOT refund after asking the other qualifying questions, however after the $1526 was deducted and then $2500 added, it was only about $1000 refund instead of $2500.  Our joint filing income is well under the maximum amount allowed. 

[CatinaT1]

That is strange. Are you saying the refund monitor changed or something changed on your forms?

The American Opportunity Tax Credit is broken down into a maximum $1,500 nonrefundable portion (used to reduce tax liability to zero) and a maximum $1,000 refundable portion (paid to you even if you owe no tax). When you look at your forms are you getting both those pieces of the credit for her? If so, the reduction of the $1,526 was not related to the credit. The nonrefundable portion will show on Schedule 3, line 3 and the refundable credit will be on Form 1040, line 29.

[diamondlil213]

Thank you for your response. When I submit my first 2 daughters' info (they are both freshmen, not sure if that matters) nothing changes (refund monitor-wise) when I answer the first question (are you pursuing an associate, bachelor's, or graduate degree). As I proceed through the subsequent questions and info from their 1098-T, they both receive the $2500 credit.  When I start the procedure for my oldest daughter (she is a senior in college but has only received the AOTC for 3 years) and answer the first question about pursuing a bachelor's degree ("yes"), the refund monitor immediately goes down by $1526 before asking any other subsequent questions that would show her eligibility.  Trying to figure out why that would trigger that refund loss before they know anything about how much she has paid for college. There is nothing different from her situation than there is for my other 2 daughters. I am married filing jointly, and we are nowhere near the $160,000 income limit. We also don't qualify for EOC. 

[Vanessa A]

I would like to take a deeper look at this. However, I need a diagnostic file which is a copy of your tax return that has all of your personal information removed. You can send one to us by following the directions below:

TurboTax Online:

1. Sign into your online account.
2. Locate the Tax Tools on the left-hand side of the screen.
3. A drop-down will appear. Select Tools
4. On the pop-up screen, click on “Share my file with agent.”
5. This will generate a message that a diagnostic file gets sanitized and transmitted to us.
6. Please provide the Token Number that was generated in the response.

TurboTax Desktop/Download Versions:

1. Open your return.
2. Click the Online tab in the black bar across the top of TurboTax and select “Send Tax File to Agent” *
3. This will generate a message that a diagnostic copy will be created.  Click on OK and the tax file will be sanitized and transmitted to us.
4. Please provide the Token Number  (including the dash) that was generated in the response.

*(If using a MAC, go to the menu at the top of the screen, select Help, then, “Send Tax File to Agent”)

[diamondlil213]

Thank you. Can I put token number here or a private message?

[diamondlil213]

I also realized we didn't receive the entire $2500 for my first 2 daughters, however nothing was deducted initially for them (the $1526 that was deducted from my 3rd)

[Vanessa A]

Here.  It cannot be used by just anyone, it is a number that is specific to sources for the TurboTax platform that the publlc does not have access to.  Also, it redacts all of your personally identifiable information.  We can't see your name, ssn or anything like that.  

[diamondlil213]

4626745263471980-33789879

[Vanessa A]

I have deleted the third child as a student I see the refund drop appropriately by $909 which is the refundable portion of the AOTC.  When I add back, the refund goes back up.  What amount of refund did you see prior to entering her as a student.  

[diamondlil213]

Thank you for looking at it. Maybe I am just confused by the AOTC. The last 3 years we have received a refund of $2500 having the one child in college. I thought having 3 would give us a $7500 refund since they meet all the eligibility and financial factors

The child I added last was the one on the top (you probably know this just want to confirm since you can't see the names). When I take her off it is now reducing the refund by $1000 (whereas before it was $1526). By taking her off it also raises the refund for my other two (daughter #1 from $2083 to 2470 and daughter #2 from $2109 to $2500. For daughter #1 we paid a little less than $4000 for tuition, so I expected hers to be a little less than $2500.  why would adding a third child reduce the refund for the other 2?

So, I guess my question at this point is what are all the variables causing the fluctuations in refund amount? If we make less than the cap, why can't we receive the full $2500 per child? I guess I also don't quite grasp the concept of the refundable and nonrefundable part of the credit either. Thank you!

I really appreciate you taking the time to help me on this matter. 

[Vanessa A · Accepted solution]

The reason you are seeing what you are seeing is due to how the AOTC works.  Although, the AOTC is $2,500, it consists of $1,500 NON-Refundable amount and up to $1,000 refundable amount (40% of your credit is refundable).  The AOTC is calculated as 100% of the first $2,000 and then 25% of the next $2,000.  So each student needs at least $4,000 in qualified expenses not covered by grants or scholarships in order to get the full $2,500.  Plus, you need to have enough tax liability to get the full non refundable portion.   So you have multiple things happening here on your return.  

1) One student has less than $4,000 expenses after applying the scholarships and grants

2) Your tax liability is less than the total of the Non-Refundable portion of the AOTC which limits your non refundable credits. 

3) Before entering the last child as a student, you are getting a portion of the $500 Non-Refundable Other Dependent Credit

The easiest way to explain is by looking at your form 1040 and form 8863.

If you look at line 16, this is your tax.  Your tax amount on line 16 eats up the non refundable credits first.  So, with 3 students you have a total of $4,500 of non refundable credits from the AOTC to eat up what is on line 16.  So if line 16 is $3,000 then you would only use the $3,000 and the remaining $1,500 cannot be used because non refundable credits cannot reduce your tax below $0. 

 Also, if you remove one of the student expenses and look at line 19, you will see that you have a number in that line where you do not when you enter the third 1098T.  This is because with or without the AOTC, you get a $500 NON refundable credit for each of your dependents that do not qualify for the child tax credit.  Once they turned 17, they no longer qualified for the Child Tax Credit, it switched over to the Non Refundable Other Dependent Credit. So whether or not the third child is entered as a student, in your case, your total tax on line 24 is $0. This means any Non-Refundable credits that did not go to wiping out what is on line 16 are lost. 

But at this point you are getting back all that you had withheld from your wages (box 2 of your W-2 or line 25d on your form 1040.  That amount is all going to be refunded to you.

This is where the refundable credit comes in. Each student is eligible for up to $1,000 of the refundable portion of the AOTC.  But the student with the highest tuition and scholarship is only able to receive $2,470 ($30 short of the full credit).  

So if you did see the refund drop immediately after saying that she was a student, the software may have taken the Other Dependent Credit out in anticipation of the AOTC being larger than the Other Dependent Credit.  The refund meter changes a lot during your tax preparation. It is not an accurate number until EVERYTHING has been entered on the return. 


What Is the American Opportunity Tax Credit?

[diamondlil213]

Thank you so much for your thorough explanation. While I still don't quite understand how all the tax laws work, this was very helpful in explaining our situation.