Let’s say both my children are enrolled as undergraduates at the same time. Tuition for both schools is $45K and net price is $60K (so I am paying a total of $30K out of pocket per year). Both schools give financial aid grants of $44K. How much will I get back with the American Opportunity Credit? Our income is below the $160K phase-out threshold.
Thank you!
For each student, if you pay at least $4000 in QEE, you can claim $2500 as a credit. Of that $1000 is refundable if you owe no taxes at all. For each student, you fill out the AOTC form with only that student’s tuition, scholarships, etc.; you do not total them.
It looks like your QEE of $45K will be close to the grants of $44k, but you can choose to have some of the grants declared as taxable and then claim the $4000 as paid toward QEE, thus allowing you to claim the full credit.
Read Chapter 2 of IRS Pub 970.
http://www.irs.gov/pub/irs-pdf/p970.pdf
Key points are that qualified education expenses(QEE) are tuition, mandatory fees and required books and supplies only, not room and board or other expenses. Also, QEE has to be reduced by the amount of tax-free scholarships/grants. Chapter 1 of Pub 970 is about when scholarships/grants are tax-free and when scholarships/grants may be taxable to the student. You can reduce tax-free scholarships/grants by having the student include an amount of tax-free scholarships/grants in their income. The same education expenses can’t be used for more than 1 tax benefit.
What did you mean by net price being $60k. Is that the COA?
I thought the answer was going to be ~$2K ($1K per child) and that was going to irritate me because I would be paying more out-of-pocket in the overlap years but getting less AOC. BUT I see now that I can mark some of the grant as going to room&board (that is, non-QEE) as long as I include that part of the grant under taxable income. This part is included as my kids income, on their tax return?
Sorry, I meant $60K per school COA, not net price.
Yes, as kid’s income, but they’ll need to include Form 8615.
You only need $4k of QEE for the max AOC of $2500 for each kid. Given your rough numbers there is $1k per kid and you can add required books and supplies to that and required fees, if any, that are in addition to tuition. The first $2k of expenses is dollar for dollar for the AOC, the last $2k is 25 cents on the dollar. So you only need each kid to declare a couple thousand as income probably. Taxable scholarships/grants are earned income for the purposes of having to file a return and for the standard deduction(see Pub 501). So they get their $6300 standard deduction for 2015 and may not even have to file a return depending on other income. But for the purpose of the kiddie tax, form 8615, this is considered unearned income so amounts over the standard deduction may be taxed at your rate(see the instructions for form 8615).
ETA: If your state has an income tax, check into how it treats this. My state treats taxable scholarships/grants as unearned income for the purposes of filing requirements and the standard deduction so my son always owed a little state tax.