Support & the Refundable AOC

[BP.]

Using the support worksheet, we can arrive at the conclusion that we have a 19 y.o. student with cash inflow from wages and his own student loans, who provides more than half his own support. He lives with Mom, but will claim his own personal exemption. Borrowed amounts and earned income both count as the student's funds.

Using the Form 8863 instructions, and concerning the refundable portion of the AOC, the requirement is that the EARNED income (wages) be more than half the support, with no mention of borrowed funds entering the equation.

http://www.irs.gov/pub/irs-pdf/i8863.pdf & TTB 12-3

Therefore, the loan proceeds are disregarded, and if the wages alone aren't sufficient to get over the 50%-of-support mark, no refundable AOC to the (otherwise self-supporting) student.

Do you read the rule this way?

BTW- Nice refundable AOC Q & A in the 8863 instructions this year, pp. 4-5.

[appelman]

I would agree.

It is basically the Kiddie Tax rule. Note, however, that he is, in principle, still entitled to the full amount of the credit, to the extent he has enough tax liability to cover it.

[mactoolsix]

Journal of Accountancy

Just did some research on this for one of our clients - found a good article in the Journal of Accountancy - down near the end is this:

"Regardless of relationship to the taxpayer, a student who obtains a loan in his or her name and uses the proceeds to pay college expenses must count the proceeds as student-provided support" It says this is from Pub 17

Here's the link to the article, which also discusses scholarship income.

http://www.journalofaccountancy.com/Issues/2011/May/20113902.htm

[BP.]

Evan- thanks! Barbara

[BP.]

a student who obtains a loan in his or her name and uses the proceeds to pay college expenses must count the proceeds as student-provided support" http://www.journalofaccountancy.com/...y/20113902.htm

Thanks, mactoolsix! Will check out link. Yes, I get that the loan proceeds count as student-provided support for the dependency support test, but I needed to clarify that they are then disregarded for the purposes of the refundable AOC.

[mactoolsix]

Not earned income

Thanks, mactoolsix! Will check out link. Yes, I get that the loan proceeds count as student-provided support for the dependency support test, but I needed to clarify that they are then disregarded for the purposes of the refundable AOC.

Reading from the instructions (which I'm sure you have) - since a loan is not compensation for any services performed, it can not be included in earned income.

Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship.

Mike

[BP.]

Cool, thanks, Mike! I printed that article- good info. But I especially loved the phrases that jumped right off the screen, like:

"What is less clear . . . "
"IRS has not clarified the situation"
"IRS has not provided guidance . . . "
"IRS has provided no guidance . . ."