Form 8863 ($1000 Refundable American opportunity credit)

[floriatax]

My friend’s son is in the same situation as my daughter:

1. He has no tax liability.
2. He claims the 1098-T on his own tax return because his parents’ income is too high to claim the education credit, and they did not claim him as a dependent.

However, my friend’s son was able to receive a $1,000 refundable American Opportunity Credit.  I tried to do the same for my daughter using TurboTax, but software did not generate Form 8863 for her, and she ended up with zero refund.  She has not yet filed her tax return.

Could you please advise why this happened, what I might have done wrong and how to properly enter the information in TurboTax?

P.S. My friend’s son did not use TurboTax for his return.

[CatinaT1 · Accepted solution]

The AOTC is worth up to $2,500. Assuming she qualified for the full credit based on her eligible tuition, the credit is divided into two parts.

1. $1,500 Non-refundable: This can only be used to wipe out taxes you owe. Because your daughter had zero tax liability, this portion was useless to her.
2. $1,000 Refundable: This is the portion the IRS will pay out as a cash refund even if you owe $0 in taxes.

This can be confusing but under IRS Section 25A, the IRS strictly bars students from receiving that $1,000 refundable portion if all three of the following conditions apply:

1. They are under age 24 and a full-time student.
2. At least one of their parents is alive.
3. Their own earned income (money from a W-2 job or self-employment) provided less than half of their total financial support for the year.

That third rule is the absolute dealbreaker. To get that $1,000 check, your daughter must have worked a job and earned enough money to pay for more than 50% of her entire cost of living (tuition, room, board, food, etc.). Student loans, scholarships, 529 plans, and money from parents do not count as earned income.

If your friend's son is truly in the exact same financial situation as your daughter (meaning his W-2 wages did not cover more than half of his total support), he should not have claimed that $1,000.