For those who don't know, the American Opportunity Tax Credit (AOTC) is usually claimed by the parent. However, if your income is too high and you don't qualify, your child can claim it instead. There are a few caveats though. (edited some of the below based on comments)
- The child will be taxed on their unearned income at Kiddie tax rates. As part of TCJA, the kiddie tax rates were changed to the same as trust tax rates.
- As part of the SECURE act, the 2020 kiddie tax rates follow the same methodology as pre-TCJA (i.e., the kiddie tax is the same as the parent's marginal rate - I'm not sure of the threshold for NIIT though). Also, the SECURE act will let you adjust your filings for 2018 and 2019 to use the old methodology. With that being said, the math generally works better by using the TCJA methodology
- If you are taking advantage of this, the AOTC will not be refundable. So, you can only get a credit for any tax liabilities
- Due to 3, you really need unearned income to take advantage of this. If you have highly appreciated stock (ideally, a stock that has tripled), you will be in good shape to take advantage of this
- For the child to take the credit, you can not claim the child as a dependent. However, the child will check the box on the return saying that he/she is eligible to be taken as a dependent.
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Long Term Capital Gain 19400 Personal Exemption - 350 First 1100 untaxed - 1100 Next 1100 taxed at DD rate - 1100 Total capital gains to tax 16850 ----------------------------------- 0-2650 (taxed at 0%) 0 2650-12950 (taxed at 15%) 1545 12950- (taxed at 20%) 780 12750- (taxed at 3.8%) 156 Total Tax 2481
Now... here is my calculation for 2020.
Marginal capital gains rate for me is 20%. So, 2500 / 0.2 = 12500. Add in the fact that the first 2200 is untaxed plus the 350 personal exemption, and this brings it to a total of 15050 of capital gains that would generate a tax liability of 2500. Does that sound correct?