CPA Exam — REG (Regulation)Federal Taxation of IndividualsMedium
A client, married filing jointly, has an AGI of $220,000. They paid $8,000 in qualified education expenses for their dependent child attending their first year of college. What is the maximum American Opportunity Tax Credit (AOTC) they can claim?
- A$2,000
- B$0
- C$4,000
- D$2,500
Show answer & explanationAnswer & explanation
Correct answer: D. $2,500
The AOTC is 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 of qualified expenses, up to a maximum of $2,500 per eligible student. The AGI phase-out for married filing jointly for AOTC begins at $160,000 and is fully phased out at $180,000. Since their AGI is $220,000, they are above the phase-out range and cannot claim the credit.
Why the other options are wrong
- A. This would be 100% of the first $2,000 in expenses, but the AGI phase-out must be considered.
- B. This is incorrect. The AOTC has specific phase-out ranges.
- C. This is the maximum AOTC per student, but the AGI phase-out must be considered.
AOTC AGI Phase-Out
The American Opportunity Tax Credit (AOTC) is subject to AGI phase-outs, reducing or eliminating the credit for taxpayers above certain income thresholds.
- Maximum credit is $2,500 per eligible student.
- For MFJ, the AGI phase-out begins at $160,000 and is fully phased out at $180,000 (2023 figures).
- The credit is 100% of first $2,000 and 25% of next $2,000 of expenses.
Memory trick: Education credit: Check AGI, then expenses, then credit limits.