Question: Rich and Tina are married and filing a joint return. Daniel qualifies as their dependent. The couple’s modified adjusted gross income (MAGI) is $167,000. After scholarships available for Daniel’s first year at UW-Green Bay, Rich and Tina paid qualified tuition and fees of $3,000. They want to claim the refundable American opportunity tax credit (AOTC), which is 100% of their first $2,000 of qualified education expenses and 25% of the next $1,000, for a tentative AOTC of $2,250. The refundable portion of the credit is capped at 40%. However, Rich and Tina’s AOTC phases out because their MAGI is more than $160,000. What is their total allowable credit, the nonrefundable portion and the refundable portion?
Answer: Their allowable AOTC credit is computed as follows: With $3,000 of qualified tuition expense, the $2,250 tentative credit x [$180,000 (upper MAGI limit) - $167,000 (taxpayers’ MAGI) / $20,000 (the difference between the minimum and maximum limit)] = (0.65) x ($2,250) = $1,463 (total).
In this case the refundable credit would be 40% of $1,463, or $585; the nonrefundable portion is $878.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.