Help on AOC_Hope Credit

[dan doshan]

Boy ..dtlee ... Read your post over a couple of times and now am not even sure what my real name is. As one radio commentator is fond of saying you may be onto something or your on something.

I guess I don't quite follow the student being half time but not full time distinction. In order to qualify for the AOC you must be at least half time so I can't see a student qualifying for the refundable portion of the credit because he is not full time. whatever full time is.. I guess I just don't see the student, in your example, qualifying for the refundable portion of the credit but would not bet my life on it.

[dtlee]

Boy ..dtlee ... Read your post over a couple of times and now am not even sure what my real name is. As one radio commentator is fond of saying you may be onto something or your on something.

I guess I don't quite follow the student being half time but not full time distinction. In order to qualify for the AOC you must be at least half time so I can't see a student qualifying for the refundable portion of the credit because he is not full time. whatever full time is.. I guess I just don't see the student, in your example, qualifying for the refundable portion of the credit but would not bet my life on it.

Yeah...I have the same problem when I read it.

The American Opportunity Credit requires that for at least one academic period in the year the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

The Kiddie Tax rules used to make a student ineligible for the refundable credit are based on the student being full-time for any part of five calendar months of the year.

A student who is age 19-23 and not a full-time student is not eligible to be claimed under the Qualifying Child rules (if not disabled) and is not subject to the Kiddie Tax and thus not ineligible for the refundable portion of the AOC.

Someone in that situation could still have little or no income and be able to be claimed as a dependent under the Qualifying Relative rules.

[Gary2]

I was looking at the support issue, in that if earned income was greater than 1/2 of the students support, the student can not be claimed as a dependent of another so dependency would not be an issue.

If the students earned income needs to be greater than 1/2 of support but if the student does not spend the earned income on their support, the student could possibly still be a qualifying relative or child of another. Not sure about that either, but I didn't research.

With regard to support: To be disqualified as a dependent, the student would have to actually provide more than half his own support, by spending his funds on support items. If, for example (and I think I may have used this here recently), if the parents of a child actor put his entire $100,000 salary into savings, while paying for his support items themselves, they can still claim him. They would need to have the paper trail showing that the child's assets weren't used to pay for support.

For the refundable AOC, if the student's earned income is more than half the support and it's actually spent on support, then there are no issues. The student isn't a dependent and the student can claim the refundable part.

This typically is only an issue when the student is not supporting himself, but the parents choose not to claim the student. This allows the student to claim the non-refundable part of the credit, but the refundable part is likely disallowed.

[Jesse]

With regard to support: To be disqualified as a dependent, the student would have to actually provide more than half his own support, by spending his funds on support items. If, for example (and I think I may have used this here recently), if the parents of a child actor put his entire $100,000 salary into savings, while paying for his support items themselves, they can still claim him. They would need to have the paper trail showing that the child's assets weren't used to pay for support.

That I understand - I don't think I said what I meant. If the student is:

•a full time student
•over age 18 at the end of 2011
•under age 24 at the end of 2011

But earned income is GREATER than one-half of support, although it is not spent on his/her own support would they then qualify for the refundable portion if the parents (if they actually provided for the support) do not take the child as a dependent?

[Gary2]

That I understand - I don't think I said what I meant. If the student is:

•a full time student
•over age 18 at the end of 2011
•under age 24 at the end of 2011

But earned income is GREATER than one-half of support, although it is not spent on his/her own support would they then qualify for the refundable portion if the parents (if they actually provided for the support) do not take the child as a dependent?

My reading is yes.

[BP.]

I think a student who is over 18 and at least half-time but who is not full-time can have zero income (or less than the exemption amount), be a Qualifying Relatvive dependent, and still be eligible for the refundable portion of the American Opportunity Credit (as long as this student is not actually being claimed by another person as a dependent). A parent of such a student with high enough income to lose eligibility for the credit and especially one who loses the exemption due to AMT, would lose nothing by choosing not to claim the dependent and allowing the dependent to receive the refundable portion.

I have not found anything that states that being able to be claimed as a dependent alone makes a person ineligible for the refundable portion of the credit (nor the nonrefundable portion).

Still trying to wrap my head around the viability of this outlook, as I really have never applied it before. Have you; with success? Look at TTB 12-4, "Choosing not to claim. . ." That says refundable portion not available to student. I happen to have a return (well, a pair of returns- student & taxpayer) on my desk right now that exactly fits your template above.

[dtlee]

Still trying to wrap my head around the viability of this outlook, as I really have never applied it before. Have you; with success? Look at TTB 12-4, "Choosing not to claim. . ." That says refundable portion not available to student. I happen to have a return (well, a pair of returns- student & taxpayer) on my desk right now that exactly fits your template above.

Just for the rest of us, the comment being referred to is this quote from TTB page 12-4:

Choosing not to claim an exemption for a dependent student.
If a taxpayer chooses not to claim the exemption for his or her dependent, the student can then:

• Claim an education credit (American Opportunity, Lifetime Learning, or Hope credit).
• Deduct qualifying student loan interest.

The student is not entitled to claim his or her own exemption.
The refundable portion of the American Opportunity credit is not available to the student.

(I added the italics to the phrase which contradicts what I am saying.)

First of all, please be careful when you say that you have a return that fits this scenario, because the key is that the student failed to be full time for at least five months of the year, but could still be claimed as a dependent by having income under $3,700. Most student dependents in this age range are full time students and it would be true that such full time student Qualifying Child dependents would not likely be able to claim the refundable portion of the credit.

I have found no basis for saying that in all situations where a student is not claimed by the parents, the refundable portion of the American Opportunity credit is not available to the student, even though that is exactly how I was taught this when this credit first appeared.

My suspicion is that the pattern we generally fall into is that we have a student which we can claim as a dependent based on being full-time students and thus make them Qualifying Children. By not supporting themselves their earnings can't be more than half of their support either and thus as a full time student with low earnings, they are thus potentially subject to the Kiddie Tax and thus cannot claim the refundable portion of the credit. There are a lot of hidden assumptions in that logic which are not always true.

Gary2 pointed out that earnings do not need to be used for support to be higher than support and the situation I am describing is a student who would not qualify as a Qualifying Child by virtue of not being a full time student.

The points raised are ways that a student would avoid being subject to the Kiddie Tax. By not being subject to the Kiddie Tax, such individuals are eligible for the refundable portion of the American Opportunity Credit.

In a nutshell, I believe that this particular quote is wrong in three out of the six possible student dependency situations which could lead to the Kiddie Tax. The quote is correct in the most common situations, but I believe the three situations where the quote is wrong, though not common, do occur.

If the student is under 18 and a dependent, the student is a Qualifying Child by virtue of age and likewise subject to the Kiddie Tax by virtue of age.

In this case, by not claiming the child, the same such child is not eligible for the refundable credit. (i.e., The quote is right.)

If the student is age 18 and a dependent, the student cannot be providing more than half of his/her own support. As Gary2 has pointed out there are two possibilities:

1. That the student has earned income that does not exceed one-half of the individual's support and is potentially subject to the Kiddie Tax or
2. That the student's income does exceed one-half of the individuals support (but was not used sufficiently for support to disallow a claim of dependency) and is exempt from the Kiddie Tax

In situation 1, the student dependent is not eligible for the refundable portion if the parents chose not to claim him/her. (i.e., The quote is right.)

As Gary2 has pointed out, in situation 2, the student would be able to claim the refundable portion when not claimed by the parents. (i.e., The quote is wrong.)

If the student is over age 18 and under age 24 and a dependent, again the student cannot be providing more than half of his/her own support, but there are three possibilities:

1. The child is a full time student whose income does not exceed one-half of the individuals support
2. The child is a full time student whose income does exceed one-half of the individuals support (but was not used sufficiently for support to disallow a claim of dependency) and is exempt from the Kiddie Tax
3. The child is not a full time student (thus being exempt from the Kiddie Tax) whose total income was less than $3,700

In situation 1, the student dependent would not be eligible for the refundable portion if the parents chose not to claim him/her. (i.e., The quote is right.)

Situation 2 is analogous to situation 2 for an 18 year old so the student would be able to claim the refundable portion when not claimed by the parents. (i.e., The quote is wrong.)

Situation 3 is the scenario I was describing and the student would be able to claim the refundable portion when not claimed by the parents. (i.e., The quote is wrong.)

Not sure if this helps or not.

[BP.]

dtlee, Thank you for your cogent and beautifully laid out thoughts!