Back Door AOTC [American Opportunity Tax Credit]

[Rose]

I understand FAFSA needs to be filled ever year and will show monies student have. FAFSA needs to be filled out not only for need-based scholarships and aids/loans but also for merit-based scholarships. Hence (high) parent's income doesn't matter.

How would gifted appreciated stocks show up in FAFSA?

Disclaimer: No experience in filling out FAFSA.

[986racer]

I understand FAFSA needs to be filled ever year and will show monies student have. FAFSA needs to be filled out not only for need-based scholarships and aids/loans but also for merit-based scholarships. Hence (high) parent's income doesn't matter.

How would gifted appreciated stocks show up in FAFSA?

Disclaimer: No experience in filling out FAFSA.

FAFSA wants to know what is in the accounts at the point the form is submitted. If possible, I would either fill out the form either before the stocks are gifted (so that they are counted at the parent’s rate) or after the stocks are sold and money is paid (so they are counted at all). If you fill it out while the student owns the stocks, it will be counted at a MUCH higher rate

[just_learning]

If the broker asks whether the transfer is a "Gift" or "Non-Gift (provide reason for transfer)" does it matter if it is listed as "non-gift"? I suppose it is a gift if the child is not a minor...
Does this have to be LTCG? Can it be STGC?

Thanks.

[986racer]

If the broker asks whether the transfer is a "Gift" or "Non-Gift (provide reason for transfer)" does it matter if it is listed as "non-gift"? I suppose it is a gift if the child is not a minor...
Does this have to be LTCG? Can it be STGC?

Thanks.

It’s a gift and I tell them so. It doesn’t have to be LTCG, but STCG are taxed at your marginal income tax rate, so the tax savings are usually worse.

[just_learning]

Ok, think I understand... the tax rate depends on parent's rate. So, if the gains are short term, those higher (parent) rates will apply even if transferred and sold by the child...
I did try using Turbo tax and with a little bit of back and forth, one can come up with the amount of LTCG required to maximize the credit. The desktop version of TT seemed to be more clear than the web version, imo.

Does the parent have to wait for the gains to become LT before transferring or can it be done earlier and the sale from the studen't account occur after the gain becomes LT?

[986racer]

Ok, think I understand... the tax rate depends on parent's rate. So, if the gains are short term, those higher (parent) rates will apply even if transferred and sold by the child...
I did try using Turbo tax and with a little bit of back and forth, one can come up with the amount of LTCG required to maximize the credit. The desktop version of TT seemed to be more clear than the web version, imo.

Does the parent have to wait for the gains to become LT before transferring or can it be done earlier and the sale from the studen't account occur after the gain becomes LT?

When transferring, the purchase date gets transferred. So, it still takes a year from original purchase for the stock to become LTCG

[GuySmiley]

Very interesting, and just in case I pursue this for my child starting college in 2025, I have decided to not contribute to her 529 next year to reserve the gift space for equities with LTGC.

[psm25]

OP, thanks for posting. I'm interested to try this. Also, since the student has to pay state tax, is it ok to use some ($5,000) of the proceed from gifted stock to contribute to 529 account that the parent is the owner and the student is the beneficiary? We live in NY state. I'm hoping we can deduct $5,000 of the student's taxable income and save $200 of state tax. Any concerns with doing this on top of back door AOTC? We plan to use both 529 accounts and highly appreciated stock in taxable accounts for college.

[986racer]

OP, thanks for posting. I'm interested to try this. Also, since the student has to pay state tax, is it ok to use some ($5,000) of the proceed from gifted stock to contribute to 529 account that the parent is the owner and the student is the beneficiary? We live in NY state. I'm hoping we can deduct $5,000 of the student's taxable income and save $200 of state tax. Any concerns with doing this on top of back door AOTC? We plan to use both 529 accounts and highly appreciated stock in taxable accounts for college.

That's an excellent question and I didn't try that as we had a residence in NJ at the time and so they couldn't really benefit from the 529 NY tax deduction.

I think it would work but my advice would be to try to model it out in Turbo Tax to see what would happen

I'll note that NY is fine with having a person listed as a dependent on the state return even if they aren't a dependent on the federal return. In fact, the instructions list AOTC as a possible reason of why one would want to have the dependencies as being different.

[montanagirl]

Either someone is legally your dependent or not. You can't elect to not claim them if you are in fact supporting them.

But that's just the law.

[986racer]

Either someone is legally your dependent or not. You can't elect to not claim them if you are in fact supporting them.

But that's just the law.

Yes, you can choose to not claim them as a dependent. That is the current law. The IRS instructions gives numerous examples of how to do this and why you may want to.

EDIT: However, I believe the converse is true. I.e., you can't choose to claim someone as a dependent if you are not supporting that person

[psm25]

OP, thanks for posting. I'm interested to try this. Also, since the student has to pay state tax, is it ok to use some ($5,000) of the proceed from gifted stock to contribute to 529 account that the parent is the owner and the student is the beneficiary? We live in NY state. I'm hoping we can deduct $5,000 of the student's taxable income and save $200 of state tax. Any concerns with doing this on top of back door AOTC? We plan to use both 529 accounts and highly appreciated stock in taxable accounts for college.

That's an excellent question and I didn't try that as we had a residence in NJ at the time and so they couldn't really benefit from the 529 NY tax deduction.

I think it would work but my advice would be to try to model it out in Turbo Tax to see what would happen

I'll note that NY is fine with having a person listed as a dependent on the state return even if they aren't a dependent on the federal return. In fact, the instructions list AOTC as a possible reason of why one would want to have the dependencies as being different.

Thank you! I will try it out in TurboTax. I found in NY529 website that only the owner of the account can deduct the state tax from the contribution. So the student will have to open a new account for this to work.

"If you're a New York State taxpayer and an account owner, you may be able to deduct up to $5,000 ($10,000 if you're married filing jointly) of your Direct Plan contributions when you file your state income taxes."
https://www.nysaves.org/home/why-ny-529 ... efits.html