Clarification on American Opportunity Tax Credit (AOC) calculation for income tax return?

Question

Background:

I am a 22 year old college graduate who got a full time job after graduation. Numbers are close to actual values but rounded for simplicity.

MAGI: $20000
Qualified Education Expenses Paid: $15000
Scholarships/Refunds: $5000

Reading Pub 970 and Form 8863 Instructions, I believe I qualify for the AOC since nobody else can claim me as a dependent, I was a full time student in 2011, and I pay for my own support costs (food, rent, gas, utilities, etc.)

Since my qualified expenses paid is greater than $4000, I use $4000 on line 2 of Form 8863, 40% of that is $1000 as the refundable AOC, and the remaining $1500 goes into the worksheet. My actual tax due based on the tax tables is $1004, which is smaller than $1500, so $1004 is the non-refundable portion of the AOC and goes on line 31 of the 1040A.

Since this is the same amount as I owe, my total tax on line 35 becomes $0. I paid $1500 in federal income tax according to my W2, plus the $1000 from form 8863, makes my total payments $2500. Payments minus tax is then $2500, so I am eligible for a $2500 refund.

This all seems right and makes sense to me based on Pub 970 and the instructions, but this is my first year (and only year) taking an education credit since I graduated in May.

Could people more familiar than me take a quick look and make sure that a) I am reading the rules right and do qualify, and b) am applying the refundable credit and non-refundable credit correctly? Thanks.

Answer 1

The keys facts are (a) your tax would otherwise be $1004, and that up to $1000 of the $2500 is refundable, i.e. your actual tax is capped at a negative $1K.

So yes, you get back every dollar you paid in, all $1500, along with the $1000 refundable credit. A $2500 refund.

From the IRS site discussing this topic.

"It is a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. Also, 40% of the credit (up to $1,000) is refundable. This means you can get it even if you owe no tax."

(you could have had up to a $1500 tax bill to capture the entire $2500 benefit.)