American Opportunity Tax Credit for Freshman

Paying for College
1

<p>If we qualify to take the American Opportunity Tax Credit but our child will only have one semester this year due to being a Freshman, does that mean we can deduct the whole $2,500 for tuition and expenses for the one semester? (In our case, we are reducting withholding to equal the $2,500 to have access to the funds pro-actively)</p>

<p>Thanks!</p>

2

<p>Read through the steps for calculating the deduction. I think that in your case you would get access to the full deduction, but I can’t recall exactly.</p>

3

<p>As long as your expense is above the $4000 (100% of first $2000, and 25% of the next $2000). Also if your income is not above the phase out limit, and if you did not take out money from 529 account that can offset this amount. Basically you can’t use the 529 dollars to pay for the expense that you also claim as qualifying AOTC expense.</p>

<p>If you don’t have the full $4000 to claim, you may want to wait until senior year to claim your last credit.</p>

4

<p>Isn’t it only the earnings in the 529 that cannot be used for and then claimed as a qualifying AOTC expense? For example, if I have 10,000 in a 529 of which I had put in 8000 and had 2000 in investment earnings. If I use the 10,000 to pay qualifying college expenses, can’t the 8000 (actually only 4000 of this) be used for AOTC expense?</p>

5

<p>The way I understand it in your example, the whole $10000 cannot overlap with AOTC expense. I could be wrong but that was the way I read it in some of the articles I saw.</p>

<p>PS: after reading up on it, what you can do in this situation is to claim the full AOTC and $4000 expense, and then you cannot claim full $10000 tax free from the 529. The amount that can be tax free from 529 is reduced to $6000, and I believe you pay tax on the prorated gain portion of the left over $4000. So if it is 20% gain, then you have to claim income of $800 ($4000 * 20%) from unqualified distribution of 529.</p>

6

<p>ttparent’s last update is correct concerning the 529. However, you should have received a 1099Q for the 529 distribution. Who’s SSN is on the 1099Q? That’s who has to report the taxable earnings. If your student’s SSN on the 1099Q, then the student has to report it. </p>

<p>Also, if you do declare part of the distribution as taxable in order to claim the AOC, the 10% penalty does not apply.</p>

<p>Pub 970 has the details of the AOC and 529 withdrawals. Read the parts in Chapters 2 and 8 that concern coordinating the two.</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf&lt;/a&gt;&lt;/p&gt;