Independent Student Eligiblity for American Opportunity Credit

[me-carney]

An 18 year old left home in the beginning of June 2023 to remove themselves from an untenable home situation and has not had any contact with their parents since.  From June through August, the student provided household services to someone for room and board.  In September, they started college full-time and worked via a work study program.  The student earned income and took out student loans.  The student lives in the dorms full time including breaks and summer.  The student has earned income though it is not a lot.  However, that is this person's only income and in addition to the student loans their only income. My question is since this student has been independent for 6.75 to 7 months of 2023 and does earn income, would the income be considered exceeding half their support when student loans are paying for some of their costs and are higher that the income?  The student also receives scholarship which is accounted for on the 1098-T. Thank you.

[TaxGuyBill]

Have you estimated the total cost of support for the ENTIRE year?

I suspect that between the parents paying for the first five months and the student loans, it seems unlikely that the student paid for over half of their own support with earned income.

[me-carney]

Thank you for your reply.

I somehow was thinking half the year and not the entire year.  She did not earn half of her support for the entire year. 

Fast forward, for 2024 she will be on her own the entire year and have to support herself.  She still will not have a lot of earned income, but more than 2023. She will live in the dorm for the entire calendar year, will have student loans, scholarships and grants. Will she be eligible for the AOC?  It is the "earned" that makes me question this as the loans, scholarships and grants are subsidies. 

Thank you.

[TaxGuyBill]

I assume you are asking about the "refundable" portion because the earned income rule doesn't apply to the non-refundable portion.

For 2024, you'll need to run the numbers when you know the total cost of support and the earned income.

In regards to scholarships and grants have special rules in regards to support (see §152(f)(5)).  I've seen a professional organization's article interpret it one way, but I interpret it another way, so that could be a bit tricky.

[me-carney]

Thanks again.  Yes, the refundable credit.

Most of her support will come from the loans, grants and scholarships. They cover her room and board at the university. Her earned income will be a few thousand dollars. I will have to read those regulations around the loans, etc. Since she is an independent student with no support from her parents, she is supporting herself with the help of loans, etc. This is the first time in almost 20 years I encountered this situation. 

[TaxGuyBill]

The way I read §152(f)(5), she won't qualify for the refundable portion in 2024 either because her loans and scholarships provide over half of her support.  But as I said, I've seen a professional article that interprets it very differently than how I read it.

[BobKamman]

§152(f)(5) applies to scholarships, not loans.  So I think we need to know the amount of each. And is a parent a co-signer on the loan?  

[me-carney]

§152(f)

(5) Special support test in case of students. For purposes of subsections (c)(1)(D) and (d)(1)(C), in the case of an individual who is—

(A) a child of the taxpayer, and

(B) a student, amounts received as scholarships for study at an educational organization ,,, shall not be taken into account.

This section seems to be talking about dependents.  This student will not be a dependent.  She is independent.  Are you referring to something else?

[TaxGuyBill]

You are right, I got sidetracked.  Sorry about the confusion.

Then that makes it solid - the student can't claim the refundable portion of the credit because you said her loans and scholarships are in excess of half of her support (therefore she will not provide over half of her support with earned income).

[Terry53029]

if the student loan is in the student's name it is considered support provided by student. Along with his earned income I would lean in the direction that he provided more than half of his support.

[me-carney]

The parents did not co-sign.  They are not in contact in any way with the student.  The student is totally on her own. The university has documentation that the home environment is unsafe for the student to be in.

[me-carney]

Ok so the student loans are considered support from the student even though not technically earned.  The scholarships and grants are considered support.  In her case the scholarships and grants are more that the loans and her income.  As it stands now, she is not eligible for the AOC.  Depending on the numbers in 2024, which may be the same or may be different, eligibility will be determined. 

Thanks.

[Terry53029]

Loans have nothing to do with the AOC. Tuition is what the credit is computed on. If grants and scholarships are more than tuition then no credit. Some times if scholarship is allowed to be used for room and board you can use the scholarship for the room and board, then if grants and leftover scholarship is less than tuition you can take credit