AOTC And New Tax Law

One of the big changes to the tax bill was making our young adult children less valuable to their parents from a tax perspective. The dependent exemption is gone and the child tax credit for 18- to 23-year-old dependents is only $500. The change does open a door to higher-income families for the American Opportunity Tax Credit, though.  The AOTC phases out at MAGI of $160,000, so it’s not unusual for families to be ineligible but to still find college unaffordable.

Here’s how the AOTC works, from

“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.”

The fact that $1,000 of the AOTC is refundable means that a person with no tax liability can still get a $1,000 tax credit. That’s double the amount of the child tax credit for a college-age student. So a student who files their own tax return can claim the the AOTC and receive the $1,000 refundable portion of the credit as long as they pay some of their qualified expenses themselves– even if they do so with money gifted by their parents or grandparents (as long as it didn’t come from a 529).

Several things to remember if you think this might work for your family:

  • Consult with your tax advisor to ensure you’re doing it correctly.
  • You cannot claim your child as a dependent on your tax return; only the tax filer is eligible to claim the AOTC.
  • The AOTC has a smaller list of qualifying expenses than does a 529. Notably absent from that list are room and board. Make sure that your student incurs expenses that are actually qualified for the AOTC.

Happy 2019! Apologies for the delay since my last post. In addition to holidays, I was sick for a few weeks.

2 thoughts on “AOTC And New Tax Law

  1. Are there any FAFSA/CSS PROFILE implications with the strategy referenced in your article “AOTC and New Tax Law” (having the student claim themselves and file a return)?

    1. Good question. One issue is, would having the student not file as a dependent make them eligible to file their own FAFSA/Profile as an independent student? The answer to that would be no unless they met one of the other criteria for independence, such as supporting themselves, having a child of their own or being in the military. On the other hand, because it will slightly increase the parents’ taxes– which would be offset by the student’s tax savings– it might have a nominally positive effect on the EFC calculation.

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