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Ask an expert: Can I use 529 plan funds to pay for college and get the American Opportunity Tax Credit?
http://www.savingforcollege.com/articles/ask-an-expert-american-opportunity-tax-credit-765

Posted: 2015-05-04

by Marguerita Cheng

CEO of Blue Ocean Global Wealth

Our 529 plan funds were invested in a money market fund and had no earnings. Do I get the American Opportunity Tax Credit when I use $4,000 from the 529 Plan to pay for my daughter's education?

College students and their parents may qualify for the American Opportunity Tax Credit (AOTC) when they file their tax returns.

American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can qualify for the maximum annual credit of $2,500 per eligible student. The AOTC is a partially refundable tax credit, which means if it reduces your tax liability to zero, you can have 40 percent of any remaining amount of the credit, up to $1,000 refunded to you.

According to the IRS, in order for an eligible student and their parents to qualify for the AOTC, the student must satisfy the following:

  • Be pursuing a degree or other recognized education credential
  • Be enrolled, at least half of the time, for at least one academic period beginning in the tax year
  • Not have completed the first four years of higher education at the beginning of the tax year
  • Not have claimed the AOTC or the former Hope credit for more than four tax years
  • Not have a felony drug conviction at the end of the tax year

Academic Period refers to semesters, trimesters, quarters or any other period of study such as a summer school session. The institutions of higher learning determine the academic periods. For schools without specific academic terms that use clock or credit hours, the payment period may be considered an academic period.

What are the income requirements for the AOTC?

  • To qualify for the full credit, your modified adjusted gross income (MAGI), must be $80,000 or less ($160,000 or less for married filing jointly).
  • You will qualify for a reduced amount of the credit if your MAGI is greater than $80,000, but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
  • You will not qualify for the credit if your MAGI exceeds $90,000 ($180,000 for joint filers).

How do I determine my MAGI, modified adjusted gross income?

MAGI for most taxpayers is the amount of AGI, adjusted gross income, reflected on your tax return. On Form 1040A, line 22 represents AGI and is the same as MAGI. For taxpayers who file Form 1040, be sure to include the foreign earned income exclusion, foreign housing exclusion, foreign housing deduction and exclusion of income by bona fide residents of American Samoa or Puerto to AGI (line 38).

No double dipping

The IRS disallows parents from “double-dipping” or utilizing more than one tax benefit for the same educational expenses. Parents who claim the AOTC for themselves or their child may not receive the full tax exclusion on 529 funds used to pay for college.

You must remove from your total Qualified Higher Education Expenses (QHEE) any of the tuition expense that you used to qualify for the AOTC. If you claim a $2,500 American Opportunity credit on a federal tax return, you cannot include the $4,000 in tuition and related educational expenses that were used to support the credit.

How do I claim the credit?

Postsecondary educational institutions provide Form 1098-T Tuition statement for each enrolled student they enroll by January 31. The information in either box 1 or box 2 of this statement shows the amounts received or billed for educational expenses and helps determine the amount of your credit. To claim the AOTC, you must complete Form 8863, Education Credits and attach it your Form 1040 or Form 1040A.

Coordination is key

Because of the coordination rules surrounding the various education tax credits and deductions, it’s important to discuss your specific situation with a qualified tax professional.


Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. Prior to co- founding Blue Ocean Global Wealth, she was a Financial Advisor at Ameriprise Financial and an Analyst and Editor at Towa Securities in Tokyo, Japan. Marguerita has been quoted and featured in numerous national publications. Marguerita is a spokesperson for the AARP Financial Freedom Campaign, a columnist for Be Inkandescent Magazine, and a personal finance contributor to Market Intelligence Center and Washington Business Journal. She is a CFP® professional, a Chartered Retirement Planning CounselorSM, and a Certified Divorce Financial Analyst. As a Certified Financial Planner Board of Standards (CFP Board) Ambassador, Marguerita helps educate the public, policy makers, and media about the benefits of competent, ethical financial planning. She serves as a subject matter expert for CFP Board, contributing to the development of examination questions for the CFP® Certification Examination. Marguerita also volunteers for CFP Board Disciplinary and Ethics Commission (DEC) hearings. She proudly serves on the FPA National Board of Directors and is a member of its finance committee. Marguerita is the 2013 Chair of the Financial Planning Association of the National Capital Area (FPA NCA). As a candid and passionate supporter of financial literacy and capability, she collaborates with the Virginia Council on Economic Education (VCEE), and teaches financial planning and investment management at the Personal Finance Institute at George Mason University, where she helps educators enhance their understanding of economics and personal finance. She studied at Keio University in Tokyo, Japan, and earned her B.S. in Finance and her B.A. in East Asian Language and Japanese Literature from the University of Maryland, College Park. Marguerita is a recipient of the Ameriprise Financial Presidential Award for Quality of Advice and the prestigious Japanese Monbukagakusho Scholarship.



CEO of Blue Ocean Global Wealth

Our 529 plan funds were invested in a money market fund and had no earnings. Do I get the American Opportunity Tax Credit when I use $4,000 from the 529 Plan to pay for my daughter's education?

College students and their parents may qualify for the American Opportunity Tax Credit (AOTC) when they file their tax returns.

American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can qualify for the maximum annual credit of $2,500 per eligible student. The AOTC is a partially refundable tax credit, which means if it reduces your tax liability to zero, you can have 40 percent of any remaining amount of the credit, up to $1,000 refunded to you.

According to the IRS, in order for an eligible student and their parents to qualify for the AOTC, the student must satisfy the following:

  • Be pursuing a degree or other recognized education credential
  • Be enrolled, at least half of the time, for at least one academic period beginning in the tax year
  • Not have completed the first four years of higher education at the beginning of the tax year
  • Not have claimed the AOTC or the former Hope credit for more than four tax years
  • Not have a felony drug conviction at the end of the tax year

Academic Period refers to semesters, trimesters, quarters or any other period of study such as a summer school session. The institutions of higher learning determine the academic periods. For schools without specific academic terms that use clock or credit hours, the payment period may be considered an academic period.

What are the income requirements for the AOTC?

  • To qualify for the full credit, your modified adjusted gross income (MAGI), must be $80,000 or less ($160,000 or less for married filing jointly).
  • You will qualify for a reduced amount of the credit if your MAGI is greater than $80,000, but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
  • You will not qualify for the credit if your MAGI exceeds $90,000 ($180,000 for joint filers).

How do I determine my MAGI, modified adjusted gross income?

MAGI for most taxpayers is the amount of AGI, adjusted gross income, reflected on your tax return. On Form 1040A, line 22 represents AGI and is the same as MAGI. For taxpayers who file Form 1040, be sure to include the foreign earned income exclusion, foreign housing exclusion, foreign housing deduction and exclusion of income by bona fide residents of American Samoa or Puerto to AGI (line 38).

No double dipping

The IRS disallows parents from “double-dipping” or utilizing more than one tax benefit for the same educational expenses. Parents who claim the AOTC for themselves or their child may not receive the full tax exclusion on 529 funds used to pay for college.

You must remove from your total Qualified Higher Education Expenses (QHEE) any of the tuition expense that you used to qualify for the AOTC. If you claim a $2,500 American Opportunity credit on a federal tax return, you cannot include the $4,000 in tuition and related educational expenses that were used to support the credit.

How do I claim the credit?

Postsecondary educational institutions provide Form 1098-T Tuition statement for each enrolled student they enroll by January 31. The information in either box 1 or box 2 of this statement shows the amounts received or billed for educational expenses and helps determine the amount of your credit. To claim the AOTC, you must complete Form 8863, Education Credits and attach it your Form 1040 or Form 1040A.

Coordination is key

Because of the coordination rules surrounding the various education tax credits and deductions, it’s important to discuss your specific situation with a qualified tax professional.


Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. Prior to co- founding Blue Ocean Global Wealth, she was a Financial Advisor at Ameriprise Financial and an Analyst and Editor at Towa Securities in Tokyo, Japan. Marguerita has been quoted and featured in numerous national publications. Marguerita is a spokesperson for the AARP Financial Freedom Campaign, a columnist for Be Inkandescent Magazine, and a personal finance contributor to Market Intelligence Center and Washington Business Journal. She is a CFP® professional, a Chartered Retirement Planning CounselorSM, and a Certified Divorce Financial Analyst. As a Certified Financial Planner Board of Standards (CFP Board) Ambassador, Marguerita helps educate the public, policy makers, and media about the benefits of competent, ethical financial planning. She serves as a subject matter expert for CFP Board, contributing to the development of examination questions for the CFP® Certification Examination. Marguerita also volunteers for CFP Board Disciplinary and Ethics Commission (DEC) hearings. She proudly serves on the FPA National Board of Directors and is a member of its finance committee. Marguerita is the 2013 Chair of the Financial Planning Association of the National Capital Area (FPA NCA). As a candid and passionate supporter of financial literacy and capability, she collaborates with the Virginia Council on Economic Education (VCEE), and teaches financial planning and investment management at the Personal Finance Institute at George Mason University, where she helps educators enhance their understanding of economics and personal finance. She studied at Keio University in Tokyo, Japan, and earned her B.S. in Finance and her B.A. in East Asian Language and Japanese Literature from the University of Maryland, College Park. Marguerita is a recipient of the Ameriprise Financial Presidential Award for Quality of Advice and the prestigious Japanese Monbukagakusho Scholarship.



 

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