AOTC & 529 scenario

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
bf0123
Posts: 89
Joined: Wed Jan 09, 2008 6:50 pm

AOTC & 529 scenario

Post by bf0123 »

Good morning, I have a question on AOTC eligibility and best 529 planning etc. First, a few relevant points:
--this year (2024) I have 2 kids in college. In 2025 I will have 3 kids in college.
--My 2024 AGI is above AOTC. So far I have cash-flowed college payments, not using my 529 plans.
--My 2025 AGI I expect to be below $160k AOTC threshold (let's assume $150k).

Originally I was planning to use my 529 plans to pay 2025 college costs for all 3 kids. However, I'm just learning about AOTC and potential usage. So, two related questions:
1. Focused on 2025 when my AGI would be low enough to qualify for AOTC, if I pay all 2025 college bills with 529 funds, would that make me ineligible to claim the 2025 AOTC credit?

2. And follow-on question: assuming the answer to question 1 above is I'd be ineligible in 2025 to use the AOTC credit: how about if I used 529 funds this year (2024) instead? And then cash-flowed college payments in 2025. Could I then claim the 2025 AOTC credit...or is there a 529 "carryover" effect or anything else I should be aware of?

Thanks!
rkhusky
Posts: 19753
Joined: Thu Aug 18, 2011 8:09 pm

Re: AOTC & 529 scenario

Post by rkhusky »

Pay $4K/child of college expenses out of pocket for AOTC and the rest via 529.

You can’t use the same expense dollars for both AOTC and 529.

Keep all expenses and reimbursements and tax credits in the same calendar year.
Last edited by rkhusky on Wed Oct 30, 2024 11:04 am, edited 1 time in total.
cshell2
Posts: 1388
Joined: Thu May 09, 2019 10:29 am

Re: AOTC & 529 scenario

Post by cshell2 »

If you don't have funds to pay for AOTC expenses outside of the 529 for the credit, you can still use the 529 by having that amount (up to 4K per student) be a non-qualified distribution. You would have to pay taxes on the gains in this situation, but the 10% penalty is waived.

eta: See "Coordination With American Opportunity and Lifetime Learning Credits" on page 52 of IRS publication 970
Last edited by cshell2 on Wed Oct 30, 2024 11:50 am, edited 1 time in total.
billfromct
Posts: 2266
Joined: Tue Dec 03, 2013 8:05 am

Re: AOTC & 529 scenario

Post by billfromct »

rkhusky wrote: Wed Oct 30, 2024 10:59 am Pay $4K/child of college expenses out of pocket for AOTC and the rest via 529.
I believe that only payment for tuition & required fees qualify for the American Opportunity Tax Credit.

When my kids went to college, in order to take advantage of the AOTC, I wrote a separate check for $4,000 each calendar year (only available “for the first 4 years years of higher education) & noted on the check, my child’s name, student ID number & the words, “Tuition Payment”.

The rest of the college expense payment was taken care of by 529 funds.

I never got audited by the IRS, but I guess it’s “better safe than sorry”.

bill
bongo
Posts: 309
Joined: Wed Oct 25, 2023 11:35 am

Re: AOTC & 529 scenario

Post by bongo »

bf0123 wrote: Wed Oct 30, 2024 10:55 am --this year (2024) I have 2 kids in college. In 2025 I will have 3 kids in college.
--My 2024 AGI is above AOTC. So far I have cash-flowed college payments, not using my 529 plans.
If your kids will have income and taxes in 2024, they could claim the AOTC instead so that it doesn't go to waste.
rkhusky
Posts: 19753
Joined: Thu Aug 18, 2011 8:09 pm

Re: AOTC & 529 scenario

Post by rkhusky »

billfromct wrote: Wed Oct 30, 2024 11:32 am I believe that only payment for tuition & required fees qualify for the American Opportunity Tax Credit.
Books and other class-required supplies, materials, and equipment are also eligible.
User avatar
Kagord
Posts: 1923
Joined: Fri Nov 23, 2018 12:28 pm
Location: Ridgeview, Ohio

Re: AOTC & 529 scenario

Post by Kagord »

Also, for AOTC, it's the year a bill is paid that counts, not when the schooling is.

Example, paid for tuition in December 2024 for Spring 2025 semester (and graduating Spring 2025), that tuition payment is in the 2024 tax year. With kids now only attending college for 2.5-3 years because of all the AP/IB and/or attending college programs in HS, that comes into play to try and get 4 years of AOTC.
User avatar
Watty
Posts: 30138
Joined: Wed Oct 10, 2007 3:55 pm

Re: AOTC & 529 scenario

Post by Watty »

bf0123 wrote: Wed Oct 30, 2024 10:55 am My 2024 AGI is above AOTC.
If you are close to the income cutoff then be sure to see exactly what is included as income. Depending on the details things like retirement account contributions or taking a capital loss in your taxable account might reduce that definition of income enough to qualify.
986racer
Posts: 678
Joined: Thu Aug 11, 2016 10:09 am

Re: AOTC & 529 scenario

Post by 986racer »

If your AGI is too high, you can also do Back Door AOTC if you have some stocks that have appreciated
Post Reply