You Make the Call - July 6, 2023

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.