AOTC question

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Retire5756
Posts: 5
Joined: Sat Sep 16, 2017 1:04 pm

AOTC question

Post by Retire5756 »

Here is my situation.
MFJ. AGI slightly above AOTC phaseout threshold for 2020 due to capital gain, but below 150 in 2019 and 2018.
DS freshman in 2020. But has approx. 7k income from part time job throughout 2020. I am going to open a Roth IRA and put $5k for him.
Should he file as independent for federal so he can get the credit for AOTC? If he file as independent for federal, does he also need to file as independent for State (IL). TT carries over status.


This gets messy with the stimulus too.
:oops:
jebmke
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Re: AOTC question

Post by jebmke »

Not sure what you mean by "file as independent" but if he qualifies as your dependent, he has to check the box that someone else can claim him whether or not you claim him as a dependent.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Topic Author
Retire5756
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Re: AOTC question

Post by Retire5756 »

I just finished a similar post and trying to digest the info.

viewtopic.php?f=2&t=343583&p=5896405&hi ... c#p5896405

But here is another question. If DS file his tax independently, will his state be IL or where the school is MI.
If he opens 529 in his name, should it be MI plan or IL plan for tax benefits.
DIFAR31
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Re: AOTC question

Post by DIFAR31 »

jebmke wrote: Mon Mar 29, 2021 11:28 am Not sure what you mean by "file as independent" but if he qualifies as your dependent, he has to check the box that someone else can claim him whether or not you claim him as a dependent.
OP's son can still (if otherwise qualified) take the AOTC on his own return if OP does not claim him as a tax dependent, even if OP could claim his son as a dependent. Be aware that $1,500 of the AOTC is non-refundable, so it sounds like a good part of the credit will go unused if it's claimed on son's return (although this may be better than if claimed by OP, depending on how far OP is into the AOTC phaseout zone).
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CAsage
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Re: AOTC question

Post by CAsage »

Your son is a dependent according to the IRS unless he provides more than 1/2 his support, generally by earning it, for the whole year. If he started as a freshman in 2020, does that mean he lived at home (possibly as a High School student and over the summer) on your nickel? Who paid for college? Research the IRS dependent rules very very carefully - you can't just pick whether he's a dependent, and if he is, you are generally better off just claiming so. Take the AOTC in 2021 and 2022, with luck Junior won't graduate too fast! IF he is a dependent, then his standard deduction is his earned income +$300... so he won't really owe any taxes to credit against.
And fine point - you aren't opening his Roth - he is. Though I will note our child gets a Magic 100% match on earnings for their Roth....
Last edited by CAsage on Mon Mar 29, 2021 6:25 pm, edited 1 time in total.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
jebmke
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Re: AOTC question

Post by jebmke »

DIFAR31 wrote: Mon Mar 29, 2021 2:36 pm
jebmke wrote: Mon Mar 29, 2021 11:28 am Not sure what you mean by "file as independent" but if he qualifies as your dependent, he has to check the box that someone else can claim him whether or not you claim him as a dependent.
OP's son can still (if otherwise qualified) take the AOTC on his own return if OP does not claim him as a tax dependent, even if OP could claim his son as a dependent. Be aware that $1,500 of the AOTC is non-refundable, so it sounds like a good part of the credit will go unused if it's claimed on son's return (although this may be better than if claimed by OP, depending on how far OP is into the AOTC phaseout zone).
Yes; but for the recovery rebate (2020) he would be ineligible.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Retire5756
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Re: AOTC question

Post by Retire5756 »

What I meant is I could choose to not claim him as a dependent.


https://hawkinsashcpas.com/why-you-migh ... dependent/
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CAsage
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Re: AOTC question

Post by CAsage »

Retire5756 wrote: Mon Mar 29, 2021 6:25 pm What I meant is I could choose to not claim him as a dependent.

https://hawkinsashcpas.com/why-you-migh ... dependent/
So this is clearly some guy fishing to get business; it's not a solid recommendation. If your child earned $7K, you can certainly claim him as a dependent, he can file his own return indicating he can be claimed, he would owe no taxes on that money because a dependent's standard deduction is "earned income plus $350". And you would still get a $500 tax credit on your return as a credit for other dependents (over 17). I did this exact thing for 2020 with my college kid. Since he owed no taxes, a non-refundable tax credit won't get you any $$$, and he doesn't qualify for a stimulus either. I did not explore attempting to get any AOTC on my child's return, but if you have tax software you can try it. What you can't do is pretend he is not a dependent to juice the return.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
Topic Author
Retire5756
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Re: AOTC question

Post by Retire5756 »

I tried 2 tax software, TT and taxslayer. 2 diff outcome.

1. TT asked :
a. Can he be claimed by others. YES
b. Will he be claimed. NO
c. Does he provide more than 50% support. NO
Outcome: default to dependent due to c. No AOTC

2. Taxslayer
a. . Can he be claimed by others. YES
b. Will he be claimed. NO
Outcome: non dependent, AOTC applied.
Katietsu
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Re: AOTC question

Post by Katietsu »

This is even more complex than what has been discussed so far.

It is true that if you choose not to claim your child, they could be eligible for the AOTC (American Opportunity Tax Credit). However, in the situation you described, the AOTC can only be used to reduce the tax liability to zero. Your son has no tax liability if his income is only $7000 of earned income. The standard deduction already reduces his taxable income to zero. Therefore, even though eligible the credit turns out to be zero. To make things even harder to understand, even if he was able to use the AOTC through the use of this rule, he would still be a dependent as Turbotax determined.

Up to $1000 of the AOTC can be refundable. This means that someone that owes no taxes can still get a $1000 refund. But, based on your OP, your son does not meet those requirements.

It sounds like you should just claim him and at least get the $500 other dependent credit.

From IRS:
“Forty percent of the American opportunity credit is refund- able for most taxpayers. However, if you were under age 24 at the end of 2020 and the conditions listed below ap- ply to you, you can't claim any part of the American op- portunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only.
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 2020, or
b. Age 18 at the end of 2020 and your earned in- come (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 2020 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 2020.
3. You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2020.”
986racer
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Re: AOTC question

Post by 986racer »

Retire5756 wrote: Tue Mar 30, 2021 9:10 pm I tried 2 tax software, TT and taxslayer. 2 diff outcome.

1. TT asked :
a. Can he be claimed by others. YES
b. Will he be claimed. NO
c. Does he provide more than 50% support. NO
Outcome: default to dependent due to c. No AOTC

2. Taxslayer
a. . Can he be claimed by others. YES
b. Will he be claimed. NO
Outcome: non dependent, AOTC applied.
That's strange. I've answered exactly the same with with TT, and it applied the AOTC. I had to run their "optimizer" though for it to make the decision.
986racer
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Re: AOTC question

Post by 986racer »

986racer wrote: Tue Mar 30, 2021 10:05 pm That's strange. I've answered exactly the same with with TT, and it applied the AOTC. I had to run their "optimizer" though for it to make the decision.
Also, with the "optimizer", it correctly decided to use the LLC for one of my children as the tax liability for that child was only $2k for the year.
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