I’m new to the profile this year, but do have a daughter in college as a freshman. We will qualify for the American Opportunity Credit for $2500 for 2015. I played around with Turbotax from last year to understand how it will work. After entering the info, Turbotax said it applied the $2,500 credit. The credit, however, appears to be split in two parts:
1040 line 50 Education credits from form 8863 - $1,500
1040 line 68 American opportunity credit from Form 8863 - $1,000
The questions asks:
Estimate the amount of 2015 education credits (American Opportunity, Hope and Lifetime Learning) that your parents will claim for 2015 using their 2015 financial documents and 2014 IRS Form 1040, line 50.
Am I supposed to enter $1,500 for this question or $2,500?
The directions say the following: "A family may be eligible to claim an American opportunity tax credit of up to $2,500 for each eligible family member enrolled at least half-time in the first four years of undergraduate study, provided that the student is claimed as a dependent by the taxpayer claiming the credit. "
That kindda implies to me that I could (should?) enter $2,500
The question asks for the amount of education credits (American Opportunity, Hope and Lifetime Learning) that were claimed on Form 1040, line 50. If you only claimed the American Opportunity credit, the maximum that can be on line 50, as Madison85 points out, is $1,500. I don’t see where there’s any implication that you can answer the question with the full AOTC amount of $2,500.
Then why are they telling me in the instructions that “A family may be eligible to claim an American opportunity tax credit of up to $2,500 for each eligible family member”? I am going to claim that full $2,500 on my taxes. It’s just split between line 50 and line 68.
I’m saying the question does not make sense. In one spot it tells you to use line 50, which I agree has a max value of $1,500, but in another spot they tell you the credit could be up to $2,500, which it is (as seen on line 50+line 68).
Both are right. The AOTC line 50 amount can be a maximum of $1,500. This is the non-refundable part of the AOTC. There is also a refundable part of the AOTC of up to $1,000. This gets reported on line 68 of the 1040, and is not included in the Profile question that asks about the amount on line 50 of the 1040.
So: use the amount on line 50 when answering the Profile question, but understand that the full AOTC may be as much as $2,500 (non-refundable + refundable).
Anyone understand how this value is used? A credit reduces taxes, which would reduce income, increase EFC, and ultimately decrease aid. Is this value added back into the taxes, ultimately increasing aid?
The value added back to taxes ultimately will decrease FAFSA EFC if not already zero.
Including the max of up to $1500 per student of the non refundable portion of the AOTC decreases FAFSA EFC. The up to $1000 refundable portion was already taken into consideration. If you have one student and enter $2500 instead of $1500 then you are attempting to double count the benefit of the $1000.
The point is that your FAFSA EFC calculated amount is not penalized if your federal income tax liability was decreased because you claimed the AOTC.
Thanks Madison. With what you said, I now I understand. On the profile, you are asked to enter you tax using Form 1040, line 56. So that is after line 50, but before line 68. If I put $2500, I would indeed be adding back too much to the taxes since the $1,000 from line 68 was not yet subtracted. So, I now agree with you guys that $1500 is the right amount to put as the answer.
The only point I’d clarify is the $1000 refundable portion was taken into consideration in the sense that it was not yet taken out of the taxes reported.
^^ the entire $2500 reduces tax liability. If you owe $3000 in taxes, the credit will reduce the amount you still owe to the IRS to $500. If you owe nothing in taxes, you have nothing to reduce but you will receive the $1000 from the IRS; $1500 of the credit is forfeited.
It is split on the 1040 to put the $1500 with the non-refundable credits (i.e., child care) and the $1000 with the refundable credits (earned income, adoption). You can use the non-refundable credits first to reduce tax liability as much as possible (maybe even to zero) and still get the full refundable portion. If you owe enough in taxes, it doesn’t make any difference which credits are applied first, but if you can zero out the liability with the non-refundable, you get to keep all the refundable funds. Any excess non-refundable credits are forfeited (unless they can be carried over, making for another fun calculation).