Question

H and W are married and have twins that are attending State University as freshmen this year. State University is on the semester system and charges $10,000 tuition per semester. H and W pay State University $20,000 this year. H and W have adjusted gross income of $165,000. The allowable HOPE (or American Opportunity Tax Credit) credit for H and W is a. $5,000 b. $2,000 c. $1,250 d. $3,750 e. $0

Answer 1

The credit is calculated as the sum of, 100% of the first $2,000 of qualified education expenses paid for the eligible student plus an additional 25% of the next $2,000 (25% of $2,000 = $500) for a total maximum claim of $2,500 per student per year. So for two student it will be $5,000.

The income limit to receive the American Opportunity Tax Credit is $180,000 when filing jointly.

However the maximum credit is gradually reduced proportionally for those making between between $160,000 and $180,000 when married filing jointly. Taxpayer whose AGI is more tha $180,000 is not eligible for American Opportunity Tax Credit.

Here the H and W AGI is $165,000.

So Proprtionate Crdit will be reduced from $5000

=5000 - (5000 x (165,000 - 160,000) / (180,000-160,000))

=5000 - (5000 x 5000 / 20000)

=5000 -1250

=$3750

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