CPA Exam — REG (Regulation)Federal Taxation of IndividualsMedium
A married couple filing jointly has an AGI of $180,000. They paid $10,000 in qualified education expenses for their dependent child to attend a public university. They are not claiming any other education credits. What is the maximum American Opportunity Tax Credit (AOTC) they can claim?
- A$2,500
- B$2,000
- C$10,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: B. $2,000
The American Opportunity Tax Credit (AOTC) is 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 of expenses, for a maximum credit of $2,500 per eligible student. However, the credit phases out for married couples filing jointly with a Modified AGI between $160,000 and $180,000. At $180,000 AGI, the credit is fully phased out.
Why the other options are wrong
- A. This is the maximum potential AOTC before any phase-out, but the couple's AGI exceeds the phase-out threshold.
- C. This is the total expenses, not the credit amount.
- D. The AOTC is fully phased out for MFJ at $180,000 AGI, making the credit $0.
American Opportunity Tax Credit (AOTC)
A tax credit for qualified education expenses paid for an eligible student for the first four years of higher education. It is worth up to $2,500 per eligible student, 40% of which is refundable.
- Credit is 100% of first $2,000 and 25% of next $2,000 of expenses.
- Phase-out for MFJ: $160,000 - $180,000 AGI.
- Phase-out for single/HoH: $80,000 - $90,000 AGI.
- Student must be pursuing a degree and enrolled at least half-time.
Memory trick: American Opportunity Credit: First four years, half-time student, AGI phase-out, $2500 max.