American Opportunity Tax Credit (AOTC) for student

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dannyboy
Posts: 75
Joined: Tue May 17, 2016 10:51 pm

American Opportunity Tax Credit (AOTC) for student

Post by dannyboy »

Hello! I'm a university student filing taxes and want to make sure I'm calculating my AOTC correctly. My parents are not claiming me as a dependent, my income is well below the phase-out threshold, and I have never claimed this credit before, so there are no worries there. Here is the relevant information:

Taxable income (1040 Line 11b): $12,300 (this is after taking standard deduction, I don't itemize)
Federal taxes owed (1040 Line 12b): $1,260
Federal taxes withheld (W-2s): $2,600
Amount spent on qualified educational expenses: > $4,000

After filling out Form 8863 for the AOTC, I get the following: my > $4,000 education spend results in a $2,500 "education tax credit" (the maximum). I am then instructed to take 40% of this ($1,000) and add it to my "taxes paid" (1040 Line 18e), resulting in $3,600 of taxes paid; this $1,000 is the refundable portion. Then, the remaining $1,500 (the nonrefundable portion) is applied to my remaining taxes, resulting in a total tax bill of $0 (because this $1,500 totally offsets my $1,260 owed). So, it seems like I should be getting a refund of $2,600 + $1,000 = $3,600.

But I have also read sources online that make it sound like I should start with my $2,500 education tax credit, subtract my $1,260 in taxes owed, and then take 40% of the remaining $1,240 as a ~$500 addition to my refund. This results in a total refund of $2,600 + $500 = $3,100, $500 less than what is calculated in the official forms. Not a world of difference, I know, but I'd rather have it than not.

Am I missing anything/did I fill these forms out correctly? And no, I am not using tax software; I would like to do this by hand once or twice to gain a better understanding. Thank you in advance! :)

Danny
mega317
Posts: 4582
Joined: Tue Apr 19, 2016 10:55 am

Re: American Opportunity Tax Credit (AOTC) for student

Post by mega317 »

I am not intimately familiar with the form, but $3,100 looks right. (If you had no tax liability then you would be taking 40% of the full $2500 = $1,000 credit.)

The way to do this is to input everything in to tax software anyway to make sure your numbers come out the same. You don't have to pay to do that.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
kaneohe
Posts: 6698
Joined: Mon Sep 22, 2008 12:38 pm

Re: American Opportunity Tax Credit (AOTC) for student

Post by kaneohe »

dannyboy wrote: Fri Apr 24, 2020 3:05 pm ...............................................................................
But I have also read sources online that make it sound like I should start with my $2,500 education tax credit, subtract my $1,260 in taxes owed, and then take 40% of the remaining $1,240 as a ~$500 addition to my refund. This results in a total refund of $2,600 + $500 = $3,100, $500 less than what is calculated in the official forms. Not a world of difference, I know, but I'd rather have it than not.

Am I missing anything/did I fill these forms out correctly? And no, I am not using tax software; I would like to do this by hand once or twice to gain a better understanding. Thank you in advance! :)

Danny
why would you trust some online sources instead of the official IRS form/wksht?
you can try this calculator https://turbotax.intuit.com/tax-tools/c ... taxcaster/
or this one https://www.hrblock.com/tax-calculator/

The IRS method is more favorable to the taxpayer since it applies the non-refundable credit first which allows more to be returned to the taxpayer once the tax obligation is met.
Last edited by kaneohe on Fri Apr 24, 2020 5:43 pm, edited 1 time in total.
the way
Posts: 344
Joined: Sat Oct 26, 2019 6:00 pm

Re: American Opportunity Tax Credit (AOTC) for student

Post by the way »

kaneohe wrote: Fri Apr 24, 2020 4:29 pm
dannyboy wrote: Fri Apr 24, 2020 3:05 pm ...............................................................................
But I have also read sources online that make it sound like I should start with my $2,500 education tax credit, subtract my $1,260 in taxes owed, and then take 40% of the remaining $1,240 as a ~$500 addition to my refund. This results in a total refund of $2,600 + $500 = $3,100, $500 less than what is calculated in the official forms. Not a world of difference, I know, but I'd rather have it than not.

Am I missing anything/did I fill these forms out correctly? And no, I am not using tax software; I would like to do this by hand once or twice to gain a better understanding. Thank you in advance! :)

Danny
why would you trust some online sources instead of the official IRS form/wksht?
you can try this calculator https://turbotax.intuit.com/tax-tools/c ... taxcaster/
or this one https://www.hrblock.com/tax-calculator/

To be fair even the intro of the main IRS page makes it sound like it's the 2nd way, but I do believe you get the whole 1k refundable. https://www.irs.gov/credits-deductions/individuals/aotc
The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you.
However, make sure to check out line 7 on form 8863. There's a check there that makes most dependent students ineligible for the refundable credit. https://www.irs.gov/instructions/i8863# ... 8579934112

btw if you have lots of unearned income, you may have to file kiddie tax form 8615. If you took money from a 529 you may have to file form 5329.
Flora
Posts: 113
Joined: Sat Mar 26, 2016 6:19 am

Re: American Opportunity Tax Credit (AOTC) for student

Post by Flora »

Are you an undergraduate student? Has the credit been claimed for fewer than 4 years? Do you provide over half of your support (food, rent, health insurance, clothing, entertainment, toothpaste, etc.) from earned income?
Katietsu
Posts: 3999
Joined: Sun Sep 22, 2013 1:48 am

Re: American Opportunity Tax Credit (AOTC) for student

Post by Katietsu »

I am assuming you meet all the requirements to claim the AOTC. Please review these as they can be confusing.

When you have $4000 or more of qualified expenses, the easiest way to look at it is this:
-First take the $1500 of the credit that is non refundable. Use it to reduce your tax liability. In your case, this reduces your tax liability to zero. You do not need to dip into the refundable part to get your liability down to zero.
-This leaves you with the full $1000 to be claimed as a refundable credit.

Since you are trying to understand how this works, redo your return assuming only $3000 of qualified expenses. I think it will help you understand the 40% part.

While I applaud that you are working through the forms and gaining important knowledge, I would recommend using software to file. It is really easy to miss something when completing things like the 8863. Also, the IRS is not processing paper returns at all right now. So it could be six months before you get your refund. And I wonder how many errors or lost returns might happen with this huge backlog. Go to irs.gov then go to free file. With your income, you will be able to do it all for free IF you link through the IRS site.
Topic Author
dannyboy
Posts: 75
Joined: Tue May 17, 2016 10:51 pm

Re: American Opportunity Tax Credit (AOTC) for student

Post by dannyboy »

Thanks for the responses! Turns out due to my age I'm ineligible for the refundable portion anyway :annoyed that'll teach me to read the fine print!
the way wrote: Fri Apr 24, 2020 5:33 pm
kaneohe wrote: Fri Apr 24, 2020 4:29 pm
dannyboy wrote: Fri Apr 24, 2020 3:05 pm ...............................................................................
But I have also read sources online that make it sound like I should start with my $2,500 education tax credit, subtract my $1,260 in taxes owed, and then take 40% of the remaining $1,240 as a ~$500 addition to my refund. This results in a total refund of $2,600 + $500 = $3,100, $500 less than what is calculated in the official forms. Not a world of difference, I know, but I'd rather have it than not.

Am I missing anything/did I fill these forms out correctly? And no, I am not using tax software; I would like to do this by hand once or twice to gain a better understanding. Thank you in advance! :)

Danny
why would you trust some online sources instead of the official IRS form/wksht?
you can try this calculator https://turbotax.intuit.com/tax-tools/c ... taxcaster/
or this one https://www.hrblock.com/tax-calculator/

To be fair even the intro of the main IRS page makes it sound like it's the 2nd way, but I do believe you get the whole 1k refundable. https://www.irs.gov/credits-deductions/individuals/aotc
The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you.
However, make sure to check out line 7 on form 8863. There's a check there that makes most dependent students ineligible for the refundable credit. https://www.irs.gov/instructions/i8863# ... 8579934112

btw if you have lots of unearned income, you may have to file kiddie tax form 8615. If you took money from a 529 you may have to file form 5329.
Flora wrote: Fri Apr 24, 2020 5:43 pm Are you an undergraduate student? Has the credit been claimed for fewer than 4 years? Do you provide over half of your support (food, rent, health insurance, clothing, entertainment, toothpaste, etc.) from earned income?
Appreciate the point about 8863 Line 7, that's where I went wrong (missed the bit about my own income needing to count for more than half of support).
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FiveK
Posts: 10328
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Re: American Opportunity Tax Credit (AOTC) for student

Post by FiveK »

dannyboy wrote: Fri Apr 24, 2020 3:05 pmMy parents are not claiming me as a dependent, my income is well below the phase-out threshold, and I have never claimed this credit before, so there are no worries there. Here is the relevant information:

Taxable income (1040 Line 11b): $12,300 (this is after taking standard deduction, I don't itemize)
Federal taxes owed (1040 Line 12b): $1,260
Based on the above,
- your AGI is $24,500
- you have ~$200 in qualified dividends and/or long term capital gains, with the rest being ordinary income.

Is that correct?
dannyboy wrote: Fri Apr 24, 2020 9:27 pm Appreciate the point about 8863 Line 7, that's where I went wrong (missed the bit about my own income needing to count for more than half of support).
If you did not provide more than half of your own support, then it's likely your parents can claim you as a dependent. They may choose not to, but you still have to check the box for "Someone can claim You as a dependent" on form 1040, with all that entails.
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