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Which route would offer more tax credits for the family?

  1. I claim $10k+ of education expenses and receive credit by filing as parents can claim me but won't.
  2. My parents claim me as a dependent and claim the education expense instead of me.

Note: Their joint income is ~$150,000 for them which says their tax rate is 22%. I made around $33,000 over 6 months. We live in California. Not sure if they can claim the $8100 tax deductions for the dependent on top of the $10000 education expense and get tax credits from both. We don't care who receives these tax credits as long as 1 route offers more than the other. Please help.

  • In California your parents would be in a 28-33% Federal bracket and 11% state bracket. That's right, 39-44%. They may pay 22% of their income in taxes, but that's because earlier dollars are taxed in a lower bracket. When looking at deductions, what matters is the "bracket" of the next dollar you earn, not the average. So 39-44% is relevant. – Harper Jan 25 at 18:18
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First thing that's important to understand about tax credits is that they offset income tax you owe. If you owed $2,000 in federal income tax (based on your income/deductions/etc) and had a $2,000 credit, you'd now owe $0 (if you owe $0 then any federal income tax withheld would be refunded to you). Some tax credits are refundable, meaning if you owed $1,000 and had a $2,000 credit you'd get refunded the extra $1,000. Others are not, meaning they can take your tax liability to $0 but no further.

The American Opportunity Credit is for people in their first 4-years of school who have no felony drug convictions, are taking classes at least half-time, and are enrolled in a degree or certificate program. The credit is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 in qualified expenses, so you're looking at maximum benefit of $2,500. It is refundable, but only 40% of the remaining credit can be refunded, up to $1,000. So if you had at least $2,500 in tax liability then you'd get the full $2,500 in benefit. At $33,000 in income assuming no major deductions or other credits, I think you'd be just under the maximum benefit. As long as your parents AGI is lower than $160,000 and they had tax liability of at least $2,500, they'd also get the full $2,500 benefit.

If you don't qualify for that, you qualify for the Lifetime Learning Credit, which would grant 20% of the first $10,000 in qualified expenses, so $2,000 maximum credit. This one is not refundable, so you'd only get full benefit if you had $2,000 in tax liability (I think you would at single with $33,000 in income). This credit phases out completely at an AGI of $130,000 for married folk, so your parents would get no benefit from this credit.

There's also a tuition and fees deduction, but it is less desirable than the credits mentioned above and your parents would only get partial benefit due to income phase out limitations.

Note that you cannot use multiple of the above in a given year, so even though you had $10,000 in expenses and the American Opportunity Credit gets maximum benefit with $4,000 spent, you can't use another credit or the deduction with the remaining $6,000.

If you provided more than 50% of your support then your parents can't claim you as a dependent. The dependent exemptions are gone and replaced with a $500 Credit for Other Dependents that your parents could take advantage of if they claimed you as a dependent. So if you didn't provide half of your own support, then there's benefit to them claiming you as a dependent and taking education tax credit.

If using online tax software, you should be able to easily add/remove the credit to each tax return to confirm you're getting the maximum benefit before filing. I don't believe any of this affects the CA state tax returns.

  • So it looks like American Opportunity Credit is the way to go. However, I am wondering if my parents should claim it or if I should claim it by not having them claim me as a dependent. I am assuming they can get the $2500 credit on top of their usual dependent tax deductions which could potentially get them $2000 back since it offers a $8100 deduction for filing jointly. Just based off my W2 info, TurboTax is saying I will get back around $2272 fed + $909 state. My W2 says I paid ~$8000 in total for fed ($4560), state ($1550), social security, and Medicare. – btrballin Jan 25 at 1:06
  • @btrballin Updated some pieces, I'm still not sure what $8100 deduction you are referring to. – Hart CO Jan 25 at 1:40
  • Sorry. I read online that you get $4050 deduction per child and 2x that if filed jointly. Is this not the case? Also, my education expenses would be for graduate school, which I believe is only applicable to Lifetime Learning Credit – btrballin Jan 25 at 2:33
  • @btrballin Ah yeah, that's a personal exemption, it went away with the new tax law, but it was just $4,050 per child. Somewhat replaced with the $500 Credit for Other Dependents. Since they can't benefit from the Lifetime Learning Credit due to their income, most likely you'd want to not be claimed as a dependent. – Hart CO Jan 25 at 2:55
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Educational expenses are only used as credit to offset taxes owed. Thus the key point of your question is lacking information: What was your earned income in 2018?

If you earned over $75K (the neighborhood in which your taxes will begin to approach $10K+), then it might make sense for you to claim the credit yourself.

If, on the other hand, your income was zero (or at least under $12K), then your parents can claim your income and not be over the $180K threshold- the point where the rules for educational expense credits begin to change.

One easy way to tell which is the better option would be to use a free online tax service. You can enter the numbers for yourself and your parents separately, then compare to the results to when you enter them together. I'm willing to bet that your family as a whole will pay less if your parent's claim your income and expenses, than if you claimed those amounts for yourself.

  • Thanks for the response. I made ~$33,000 gross. From my understanding, my income is irrelevant for the education credits. I heard I get $2000 back as long as my expense is $10,000 or more. – btrballin Jan 24 at 23:58

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