American Opportunity Credit - "5 year Plan"

[FSC]

Qualified student is now in 5th calendar year taking courses as senior (4th academic year). Tax Reg state that only 4 TAX YEARS are allowed for AOC. That means 5th year courses are only eligible for Lifetime Credit and not AOC? .... Seems unfair that some bright senior high school kids may take one or two college eligible courses and have that count as one of the IRS's allowed four TAX YEARS.

[Burke]

.... Seems unfair that some bright senior high school kids may take one or two college eligible courses and have that count as one of the IRS's allowed four TAX YEARS.

They don't. However, most college students enroll in college in the fall following their high school senior year, and that first semester/quarter etc does count. It may behoove parents to weigh using LLC for that year, and save the AOC for the following 4 years.

[David1980]

It wasn't very long ago that we had the Hope credit with just 2 years. Now we have 4 with AOC. 4 is better than 2, at least for the taxpayer receiving the credit. Why 4 years? Why was hope 2 years? Why is the child tax credit 17 years? I don't think the limit is there to punish those who take more than 4 tax years to get their degree. 4 years is just the limit.

[mactoolsix]

They don't. However, most college students enroll in college in the fall following their high school senior year, and that first semester/quarter etc does count. It may behoove parents to weigh using LLC for that year, and save the AOC for the following 4 years.

Burke - you are so correct . . . . . I preach this all the time -to clients, family and friends, however most want the max credit they can obtain in year one, and take AOC. It's one thing to know what's best, but a different thing to get them to follow. Some have told me that their kid will only need four years to get that degree, then in the fifth year "it was the colleges fault."

Mike

[ATSMAN]

I gave the same advice to my brother. My niece started college last fall and we are going to do some analysis and see which method gives the best tax credit. I have a feeling that the last semester is going to be just a few credits because this girl is taking full time credits and some. She will take a summer credit course also.

[mastertaxguy]

Qualified student is now in 5th calendar year taking courses as senior (4th academic year). Tax Reg state that only 4 TAX YEARS are allowed for AOC. That means 5th year courses are only eligible for Lifetime Credit and not AOC? .... Seems unfair that some bright senior high school kids may take one or two college eligible courses and have that count as one of the IRS's allowed four TAX YEARS.

Do not overlook the posibility of repaying an earlier year's Hope College Credit, even though more than 3 years have lapsed, and taking advantage of the AOC in the current, or prior open, tax years. The AOC may result in significant tax savings for the taxpyaer. For example, a student who received 1 or 2 years of Hope College Credit prior to 2009 but then had their education interrupted only to pick it up again in 2010, 2011, 2012, or 2013 may be able to take advantage of the AOC over the lifetime learning. I was able to do that several times in for 2011 and 2012 tax years. In some cases, the TP can repay an HCC of $1500.00 prior to 2009, and on an open return for 2010 receive the $1500.00 AOC AND the $1000.00 refundable HOC. Seems like we had this issue last tax season on this forum.

[FEDUKE404]

Separate question

While I understand there may be some "reasons" for not claiming AOC for a given calendar year including freshman fall semester, the scenario here is a bit different.

Many (most?) local universities, at least of the state-supported type, require payment of expenses for each spring semester to be paid well before 12/31/20xx of the preceding calendar year. For all intents and purposes, the student can legitimately claim four "full" years of AOC (things change when/if grad school arrives) without too much confusion. (Or, stated otherwise, for the spring semester when the student is a senior, there are no education credits available/taken.) There is no "pick the best four out of the five" issue to resolve.

The greatest problem, from a tax standpoint, is reconciling what was paid when in combination with those pesky Forms 1098-T.

Am I missing something?

FE

[Burke]

Many (most?) local universities, at least of the state-supported type, require payment of expenses for each spring semester to be paid well before 12/31/20xx of the preceding calendar year. For all intents and purposes, the student can legitimately claim four "full" years of AOC (things change when/if grad school arrives) without too much confusion. (Or, stated otherwise, for the spring semester when the student is a senior, there are no education credits available/taken.) There is no "pick the best four out of the five" issue to resolve. Am I missing something?
FE

I have found this to be the case in many situations. Colleges used to bill early, and it had to be paid before the semester started, giving the student/parents into the next year before the deadline arrived. I just did one where they gave the college senior a $200 "savings" on the spring semester if paid before the end of the prior calendar year. By doing this, the client lost the AOC for the current year. They didn't need it in the preceding year as they had already maxed out with that year's tuition. And there is always the scenario where the student drops out of school. Then you can amend the first year -- if it's not too late.

[Kram BergGold]

Call the University

My duaghter's school required a payment in Dec. I called to say that I would pay on Jan 2, so as to be able to take maximum advantage of the AOC. They said no problem. And there was none.

[Burke]

I am sure it would be okay with the school. The problem is, the parent doesn't think about it, and by the time we do the return the following spring, its too late.

[FEDUKE404]

What is the advantage?

My duaghter's school required a payment in Dec. I called to say that I would pay on Jan 2, so as to be able to take maximum advantage of the AOC. They said no problem. And there was none.

Can you please explain your reasoning re "take maximum advantage of the AOC" if the (somewhat common?) scenario exists where each spring semester is indeed PAID before the end of the prior calendar year?

If all undergrad college expenses could be paid/claimed within a four-year period, what is the specific advantage of postponing a payment to the following year? Or, said differently, are you not losing something re the (first) fall semester payments in the year you (apparently) choose not to claim the AOC? It almost sounds as if you would, in effect, be getting 3 1/2 years, instead of 4 years, of "college expenses" via AOC by not taking semester #1 ??

Sorry for my confusion. For my two offspring, each claimed four years of AOC using the "pay in December for spring semester" approach in all instances. Each and every tax year for the AOC covered two semesters (and even an occasional summer session).

FE

[LCP]

Do not overlook the posibility of repaying an earlier year's Hope College Credit, even though more than 3 years have lapsed, and taking advantage of the AOC in the current, or prior open, tax years. The AOC may result in significant tax savings for the taxpyaer. For example, a student who received 1 or 2 years of Hope College Credit prior to 2009 but then had their education interrupted only to pick it up again in 2010, 2011, 2012, or 2013 may be able to take advantage of the AOC over the lifetime learning. I was able to do that several times in for 2011 and 2012 tax years. In some cases, the TP can repay an HCC of $1500.00 prior to 2009, and on an open return for 2010 receive the $1500.00 AOC AND the $1000.00 refundable HOC. Seems like we had this issue last tax season on this forum.

In general...... how does one volunteer to correct a "problem" in a closed year and then be sure that they will be allowed to benefit going forward under the new scenario?

[Burke]

Can you please explain your reasoning re "take maximum advantage of the AOC" if the (somewhat common?) scenario exists where each spring semester is indeed PAID before the end of the prior calendar year?

If all undergrad college expenses could be paid/claimed within a four-year period, what is the specific advantage of postponing a payment to the following year? Or, said differently, are you not losing something re the (first) fall semester payments in the year you (apparently) choose not to claim the AOC? It almost sounds as if you would, in effect, be getting 3 1/2 years, instead of 4 years, of "college expenses" via AOC by not taking semester #1 ??

Sorry for my confusion. For my two offspring, each claimed four years of AOC using the "pay in December for spring semester" approach in all instances. Each and every tax year for the AOC covered two semesters (and even an occasional summer session).
FE

Cannot you claim the LLC in that fifth tax year? That's 20%, which is something at least. But not if you paid it in the previous year. In some cases, college tuition (especially out-of-state) is so expensive, you only need one semester to max out the AOC. That's what happened in my case.

[mastertaxguy]

In general...... how does one volunteer to correct a "problem" in a closed year and then be sure that they will be allowed to benefit going forward under the new scenario?

Simple. There is NO statute of limitations on paying taxes via late filed, or amended tax returns. Closed refers to refund claims and in general, the ability of the Service to audit a return (subject to the special 6 year statute of limitations). As mentioned earlier, last tax season I was involved in situations where the taxpayer did exactly as outlined. In some cases, the parents filed the amended return, repaying the Hope Credit, and then the student (former dependent) filed a current year return claiming the AOC for what was the the third (or fourth) year. In other situations, the studnet was under age 24, returning to school after taking some time off for "life lessons" before moving back with mom and dad and presenting them with a grandchild or two.

If one is not comfortable with this, don't worry about it and don't do it. While I don't want to buy audits, I do not work for IRS.

None of the TP's have contacted me regarding IRS correspondence, and I will be seeing them after 2-01-14.

[New York Enrolled Agent]

Simple. There is NO statute of limitations on paying taxes via late filed, or amended tax returns. Closed refers to refund claims and in general, the ability of the Service to audit a return (subject to the special 6 year statute of limitations).

Sorry but I don't agree - If the statute for assessment is closed, then the IRS will consider any money sent on an amended return with increased tax liability to be an overpayment and will send the money back to the taxpayer.

§6401(a) (a) Assessment and collection after limitation period

The term "overpayment" includes that part of the amount of the payment of any internal revenue tax which is assessed or collected after the expiration of the period of limitation properly applicable thereto.


The assessment statute works both ways - on the IRS and the taxpayer. You can also find a decent discussion on this in IRS ILM 201052003.