My income too high for AOTC this year, can my daughter claim it instead?

[Anonymous]

I am phased out of the AOTC credit this year because of a year-end bonus.  Is it possible for my daughter to take the credit (she is the student). 

She is 20 y/o, I claim her as a dependent, and she makes about $10K per year.   She has student loans so she receives a 1098-E, but the interest is deferred so I don't think she has any interest payments to report there.  She got a 1098-T with tuition of $14580 and grants of $2350.  The 1099-Q lists me as the recipient, not her.  Her 529 account (that I pay much of her tuition and rent with) lists me as the account owner and she as the beneficiary.  I always pay the full $4K on the first tuition statement so I meet the max qualification for the AOTC (the cash payments portion). She also pays $5K per year towards her tuition with cash. I am willing to not claim her as a dependent and give up the $500 dependent credit that I would receive if she will be able to get a larger AOTC than the dependent credit we get for her now.  I just don't know if it's possible that she'll get anything back because as I understand it some of the AOTC is a credit, and some just reduces tax liability back to $0. And because her income is so low, her tax liability is already $0.

Is this a viable solution so we don't lose the credit for the year?  Are there certain steps I would need to take to make this happen?  I assume I would not claim her as a dependent but anything else?  Would it even work because I'm the 529 owner and the recipient on the 1099-Q?  We've always gotten the full credit in years past because our expenses always exceed the 529 disbursements by quite a bit, and this year is no different in that respect.

Thank you!

[Spino]

First, it's always good to have higher income, so enjoy that!

It sounds like your daughter actually is your dependent. This is based on specific tests, not a family's discretion. So if you don't claim her as a dependent, be sure you can justify it according to the rules. Note, however, that families do have a fair amount of discretion in giving each other gifts, which are not counted as income. (Again, be sure you document and can justify whatever you do.)

Since income is usually determined before the end of the tax year, you can't do too much to change that. There are only a few specific things that might lower your income after the year ends, like deductible HSA and IRA contributions. So most of the tax planning you can do will have to be for future years. It is often possible to move income between years in different ways (by planning in advance.) Like you note, often the best tax planning is to keep your income level or gradually increasing rather than fluctuating a lot from year to year. If tax planning doesn't strike you as DIY, a good accountant might be worth consulting.

[rjs]

You do not have to claim your daughter as a dependent if you don't want to, even if she meets all the qualifications to be your dependent.

IRS Publication 970 says the following.

"IF you don't claim on your tax return a dependent who is an eligible student (even if entitled to claim the dependent), THEN only the dependent can claim the American opportunity credit."

If your daughter qualifies as your dependent, but you do not claim her, on her tax return she still has to check the box that says that someone can claim her as a dependent.

[Anonymous]

OK, so I looked at both answers and I think I understand why you say she is basically required to be a dependent.

IRS Pub 970 says :You don't qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.
1. You were:
a. Under age 18 at the end of 2022, or
b. Age 18 at the end of 2022 and your earned income (defined below) was less than one-half of
your support (defined below), or
c. Over age 18 and under age 24 at the end of 2022
and a full-time student (defined below) and your
earned income (defined below) was less than
one-half of your support (defined below).
2. At least one of your parents was alive at the end of
2022.
3. You are filing a return as single, head of household,
qualifying surviving spouse, or married filing separately for 2022.
Earned income. Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. 

If I answer these questions as if I were my daughter, the answer to 2 and 3 is an easy yes.  The answer to 1c, I believe is yes, because she is 20, full time student, and only makes 10K, and her tuition/room/board adds up to about 23K.  Since 10K is less than half of 23K, this means that she needs more than half her support from someone else.  Am I reading this right, and therefore correct in determining that this is why she is not eligible for the credit?

Obviously it's too late for me to "gift" her money since 2022 has ended, but good future info!

[MinhT1 · Accepted solution]

On her own tax return, she is asked the question whether she paid more than half of her own support. If the answer is No, then she has to say that she can claimed as a dependent by someone else (even if you do not actually claim her).

As someone who can be claimed as a dependent but is not actually claimed, she can claim the non-refundable part of the American Opportunity credit ($1,500), but not the refundable part ($1,000).

If she has no tax liability, she cannot use the credit at all. In this case, by claiming her as a dependent, you will get the Other dependent credit of $500. Please note that this credit begins to phase out at income of $200,000 (single) or $400,000 (MFJ), which is higher than the phase-out of the AOTC.