Author Topic: AOTC - three questions  (Read 221 times)

retired?

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AOTC - three questions
« on: October 08, 2017, 10:58:34 AM »
Hi.  I have two kids, two grades apart.  So, if they take the path of 4-year college straight out of HS, I will have:

 - one in college for two years.
 - both in college for the next two years.
 - younger one in college the following two years.

Was reading about the AOTC.  We have 529s for each child that will about cover the cost of college. 

1.  I read it is not fully refundable.  i.e. if your taxes are less than $2500, at most $1k will be refunded.  e.g. if you taxes are $0, then it would be worth $1k to you.  What about when you have two kids qualifying in the same year?  i.e. with zero taxes, is it at most $1k per kids or $1k total?

2.  Read that the expenses used to qualify for the AOTC cannot be expenses that are used for zero tax 529 withdrawals.  The example I saw wasn't complete.  It seems that if my 529s cover all college expenses that I would not be able to use the AOTC, and perhaps should choose to leave some $$ in the 529s for grad school or to cover a different beneficiary.

So, if college expenses for one child are $15k in a tax year and I use $11k from 529 and $4k from other, then the child would qualify.  Is it as simple as "to get full benefit, at least $4k of expenses must not come from a 529"?. 

3.  Also, does it matter how much of the 529 balance was contributions vs. investment earnings?  Seems possible that the amount coming from the 529 that limits the AOTC should only be the investment earnings.  i.e. one whose balance is 50/50 contributions/earnings would be more limited than one who is 80/20 contributions/earnings.

Thanks.

MDM

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Re: AOTC - three questions
« Reply #1 on: October 08, 2017, 04:22:20 PM »
1.  I read it is not fully refundable.  i.e. if your taxes are less than $2500, at most $1k will be refunded.  e.g. if you taxes are $0, then it would be worth $1k to you.  What about when you have two kids qualifying in the same year?  i.e. with zero taxes, is it at most $1k per kids or $1k total?
$1K/kid.  See 2016 Form 8863 - f8863.pdf and 2016 Instructions for Form 8863 - i8863.pdf.

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2.  Read that the expenses used to qualify for the AOTC cannot be expenses that are used for zero tax 529 withdrawals.  The example I saw wasn't complete.  It seems that if my 529s cover all college expenses that I would not be able to use the AOTC, and perhaps should choose to leave some $$ in the 529s for grad school or to cover a different beneficiary.
Yes.  You may be referring to Any qualified expenses used to figure the education  credits cannot be taken into account in determining the  amount of a distribution from a Coverdell ESA or a  qualified tuition program (section 529 plan) that is excluded from  gross income. See Pub. 970, chapters 6 and 7, for more  information. in the 8863 instructions.

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So, if college expenses for one child are $15k in a tax year and I use $11k from 529 and $4k from other, then the child would qualify.  Is it as simple as "to get full benefit, at least $4k of expenses must not come from a 529"?.
Yes.

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3.  Also, does it matter how much of the 529 balance was contributions vs. investment earnings?
No.

retired?

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Re: AOTC - three questions
« Reply #2 on: October 08, 2017, 10:57:49 PM »
Thanks, MDM.

Tells me that perhaps I should slow up on contributions for our younger child.....since I've been saving to target total cost.....granted that is still quite unknown.


MDM

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Re: AOTC - three questions
« Reply #3 on: October 14, 2017, 12:25:09 AM »
...is it at most $1k per kids or $1k total?
This thread prompted a modification in the case study spreadsheet to allow credits for more than one student.  If you are interested, see cells B73 and AH38 on the 'Calculations' tab.
The non-refundable and refundable credits appear in cells G25 and G31 respectively.