Q1. If we don't claim them as dependents, can they qualify for the tax credit on their own tax filing?
A1. No, except that the 24 y.o. can.
Q2. When working on their tax forms, Turbo Tax is applying $1,000 of the credit to our 24 & 22 year old, but not our 19 year old. Is age the reason why?
A2. Yes. But the age limit 24. So, the 22 y.o. does not qualify* (unless he's less than a full time student).
Q3. If less than $1,000 of education expenses was paid for outside of a 529 account, should we apply for that amount for the credit instead? $850 in this case - for a laptop.
A3. For those eligible for the credit, you would allocate at least $2000*** of expenses to the credit, even if you pay some tax on the 529 distribution. But, your situation is borderline. So, probably yes.
Q4. Is it better to just claim them as dependents on the parent's tax return and get the $500 dependent credit instead?
A4. My eye ball estimate says it's about the same. They get $800 vs your $500. But you have to reduce their $800 by any tax you pay on the 529 distribution. See example below**
* A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit.
You cannot claim the (up to) $1000 refundable credit if you are, or can be, claimed as a dependent by someone else.
Reference: Line 7 instructions for form 8863.
https://www.irs.gov/instructions/i8863#en_US_2024_publink53002gd0e674
**Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board which is only qualified for the 1099-Q)
-$3000 paid by tax free scholarship***
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q (on the recipient’s return)
Box 1 of the 1099-Q is $5000
Box 2 is $2800
3000/5000=60% of the earnings are tax free; 40% are taxable
40% x 2800= $1120
There is $1120 of taxable income (on the recipient’s return)
*** The AOTC is 100% of the first $2000 of expenses and 25% of the 2nd $2000.
