Who can — and who should — take the American Opportunity credit?
March 21, 2017
If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.
The limits
The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.
The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.
Running the numbers
If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.
Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).
If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.
We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.
Upcoming Events
Exempt Organizations Conference
December 17, 2019
Wilmington Trust Philanthropic Speaker Series
December 17, 20192019 Nonprofit Symposium
December 17, 2019Responsible 100 Awards Luncheon
December 18, 2019TCJA Updates and the Impact on Nonprofits, Donors and Beyond
December 19, 2019Heckerling Institute on Estate Planning
January 13-17, 2020NYSSCPA Annual Nonprofit Conference
January 16, 2020IMN Winter Forum on Real Estate Opportunity & Private Fund Investing
January 22-24, 2019Disaster Recovery Journal’s Spring 2020 Conference
March 15-18, 2020View All Events