American Opportunity Credit for Child

My eldest daughter graduated from her University in May 2016 and started her career shortly thereafter. She still lives in our home, so I can claim her.
My joint income is too high to receive any American Opportunity Credit for the January-May 2016 semester tuition that I paid.
Question: Could I have my daughter claim herself instead of me claiming her, then have her take the AOC, in which case she would receive the entire $2500 credit? Does it matter that I paid the tuition bill? This $2500 credit more than offsets the tax savings I would receive by claiming her $4050 exemption in my 25% marginal tax bracket.
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And having researched some more:
I paid for the tuition with a distribution from our 529 plan of $4148, of which $889 is considered earnings.
The tuition was $4148, which is the Qualified Educational Expense (QEE).
Per Pub 590, Chapter 8 (Qualified Tuition Plans), section on Coordination With American Opportunity Credit and Lifetime Learning Credit, I have to adjust the QEE by the amount used in figuring the Lifetime Learning Credit, which is the entire $4148, leaving an Adjusted QEE (AQEE) of zero.
Therefore, the entire $889 earnings becomes taxable income on my daughter's return.
At a marginal Federal tax rate of 15%, she'll owe an additional $889 x .15, $133 in Federal Tax.
At a marginal state tax rate of 7.95%, she'll owe an additional $889 x .0795, $71 state tax.
So the example below where I thought together we'd save $630 in total tax is reduced by $204 (sum of $133 and $71 above).
So now we'll save $426. Eh. Better than claiming her and she not taking the LLC.
One last question. While this was the last semester in her fifth year, I did not take the AOC in all four prior years, perhaps only once due to income limits. Can she take the AOC? I believe the answer is no as if I interpret correctly, even if you never take the AOC, you cannot take it for a fifth year of University expenses.

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On 12/17/16 7:36 PM, Dimitrios Paskoudniakis wrote:

See my reply to your first post. Then... it is not the number of years she attended college that limits the ability to claim the AOTC. As long as no one has claimed the Hope/AOTC for 4 tax years, she can claim the AOTC if you forego the exemption. The allowable AOTC amount is $4000. Subtract that from qualified expenses of $4148 and you have a balance of $148. To determine how much of the $148 is taxable, use the formula on page 61 of Pub 970 under Coordination with the AOTC.
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wrote in message

Thank you for the information.
Now that you've informed me that neither I nor my daughter can claim her personal exemption in order for her to take the education credit, and as I'll discuss below I don't believe she can take the AOC only the LLC, we're better off not taking the credit and for me to take her exemption as usual.
My daughter is 23 years old, so you're correct, she cannot take the refundable portion of the AOC.
However, to clarify:
Per Line 25 of Pub 970, even though we have not taken 4 years of AOC/LLC credits, she did complete the first 4 years of University prior to 2016 and thus she cannot take the AOC. This 2016 semester was in her fifth year. Line 23 covers whether the credit has been used 4 times yet. Both criteria must be met - you cannot have taken the credit 4 times, and you must be within the first 4 years of your University education to get the AOC.
Per the Instructions for Form 8863 (I8863), page 2: "As of the beginning of 2016, the student had not completed the first 4 years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution."
Can you please explain why you think she can still take the AOC?
Second, I disagree with your tax computation. The amount of tuition is $4148, of which $889 is gain. Therefore the non-taxable portion is 889 x (4148 - 4000) / 4148, so the taxable portion is 889 - that amount, which is 889 x 4000 / 4148 = $857. See Example 2 page 61 of Pub 970. Correct?
The LLC is only 20% of the $4148 tuition, $830. When adding the $850 to her income in her marginal 15% Federal and 8% state brackets, her net tax reduction is $617, but my combined Federal and state taxes go up by $1063 by not claiming her exemption, so if she can't claim the AOC, then this is a moot exercise.
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On 12/19/16 3:21 PM, Dimitrios Paskoudniakis wrote:

If she is still classified a senior and not a first semester graduate student and does not have a bachelors degree, she has not completed 4 years. Today, one can be classified as a full time student taking just 12 semester hours. It would take 10 semesters or five years before one would have finished 4 years of college (120 credits hours). Some schools might require up to 140 units for an engineering degree. At 12 units per semester, that would take almost 6 years to complete. During that whole period, the student would carry a designation of either freshman, sophomore, junior or senior.
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On 12/19/16 3:58 PM, Alan wrote:

I should have added.... the AOTC does not even require you be a full time student.. only a half-time student. Therefore, it certainly would take more than four calendar years before you ever finished four years of college. A reason why one must be careful in choosing the four tax years for claiming the AOTC.
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wrote in message

Understand your points. In her case, she did complete 4 years' worth of full-time credits through 4 years, but needed a fifth year as she changed her major and needed the requisite courses. I will assume however, that she can take the nonrefundable AOC (she's under 24 years old), in which case we'll net a $600 tax savings. Not bad. Thanks.
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On 12/20/16 8:53 PM, Dimitrios Paskoudniakis wrote:

What matters is how the school categorizes her at the start of the semester.
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On 12/17/16 3:13 PM, Dimitrios Paskoudniakis wrote:

If your daughter is your dependent in 2016, you may forego claiming the dependency exemption to allow her to claim the AOTC. It does not matter that you paid the education expenses. However, as she is your dependent, she can NOT clam a personal exemption for herself on her tax return. Additionally, please see page 21 in IRS Pub 970 if your daughter is under age 24. There is a set of criteria that will disallow the refundable part of the credit to your daughter. The full credit will be available as a nonrefundable credit.
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She graduated in May 2016. From that point forward, she is over 19 and not a student, including at the end of the tax year. Can she claim herself as a result and still take the AOTC? Does the fact that I provide more than 50% of her support matter if she's over 19 and no longer a student? It doesn't matter for her Federal return, but if she can claim herself, then she can claim herself on her Maryland return and get the personal exemption deduction.
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On a side note, by eldest is back in school and we can't remember if she used up all of her credit for schooling. Since this was about 10 years ago, the records are long gone. Don't suppose there is anyway to figure if she has any credits left?
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On 2/24/17 7:35 AM, Kurt V. Ullman wrote:

The only way I know of is to apply for the AOTC and keep your fingers crossed.
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On 2/23/17 5:26 PM, Dimitrios Paskoudniakis wrote:

The definition of a fulltime student under the age of 24 requires any part of 5 months as a fulltime student. If she meets that criteria, she is your qualifying child (dependent). If she fails that criteria, she could still be your qualifying relative (dependent) if you provided more than 1/2 of her total support AND her gross income was less than $4050.
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Thanks.
She was a full-time student for the Spring 2016 (January - May) semester and under 24. Therefore, she won't claim herself.
A related issue is that as previously discussed, she is adding $880 to Form 1040 Line 21 (Other Income) which is the prorated taxable portion of her 529 plan distribution gain when adjusting her qualified educational expenses to exclude the amount used to claim the AOTC (Pub 970, Page 59, Example 2). I contacted our state (Maryland) taxpayer services with my assertion that she should be able to subtract this $880 from her state income on the grounds it was added only for the purpose of claiming the Federal-only AOTC, and thus should be an allowed subtraction from her Maryland AGI. There is no income subtraction category for this scenario on the Maryland return. The Taxpayer Services representative acknowledged my point, but indicated I would have to write to my state legislators to enact a revision to the tax code as there is currently no provision to do so.
Could I instead exclude this $880 from her state AGI reported on her state return (which therefore won't match her Federal AGI)?
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On 2/25/17 12:29 PM, Dimitrios Paskoudniakis wrote:

I am not familiar with MD taxes other than it starts with Federal AGI and adds and subtracts from that. Your logic fails me. A distribution was taken from a 529 plan that contained untaxed earnings. The whole amount distributed was not used for "qualified" higher education expenses and created a taxable distribution. The taxable amount flows to your federal return and for just about every other state that I am familiar with, flows to the state return as well unless the state has enacted an exclusion.
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The amount not used for "qualified" higher education expenses were only unqualified for the purpose of taking the Federal-only AOTC. If not for taking the Federal-only AOTC, the entire distribution would be tax free. Since the Federal-only AOTC doesn't apply to one's state taxes, the taxable part of the distribution should be Federally taxable only, and zero taxable for state. There is no state AOTC.
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