College Corner – Can My Child Claim The American Opportunity Tax Credit?

by | Jun 4, 2018

This is the third installment of “College Corner”.  We’re always receiving questions on college planning so we thought it would be a good idea to field some of those questions in a blog format.  As usual if you ever have a question just send it our way.  This week’s question focuses on tax planning for college.

If we don’t qualify for the American Opportunity Tax Credit (AOTC) is it possible for our children to take the credit on their tax return?

Yes!  This is an extremely valuable tax credit that can provide each of your children with up to $10,000 in college funding.  That being said we regularly see people fail to take advantage of it.  Let’s take a quick look at the necessary requirements to garner the credit.

  • Student has not completed the first four years of post-secondary education and been enrolled at least half time for at least one academic period as of the beginning of the taxable year
  • Income phase-out for claiming the AOTC is $160,000 – $180,000 of modified adjusted gross income on joint tax returns ($80,000 – $90,000 for single tax filers and head of household)
  • Credit is calculated on 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000
  • Qualified educational expenses will be reduced if you pay for those expenses with scholarships, tax-free assistance or use expenses against tax-free 529 distributions.

So what if you make too much to claim the credit?  See if your child can qualify for it.  Children who pass the support test, meaning that they use their assets, income and student loans to pay more than half the cost of college can claim the personal exemption ($4,050) on their own tax return.  This in turn allows them to take the full standard deduction ($6,300) and the AOTC (up to $2,500) for themselves.

This can prove to be an extremely valuable tax strategy for reducing income and capital gains, even if your child is subject to the kiddie tax.  You can couple this with income shifting strategies by gifting appreciated securities to your children and having them sell the positions during their college years to pay education expenses.

Tax aid is just one component of a comprehensive college planning strategy.  You should also integrate college selection, financial aid optimization and personal resources into your plan.  Covering all these bases will help your child get in the best school, save money and protect your retirement.