Question

Dorothy is a junior at State College. To offset the cost of attending college full-time, Dorothy has a part-time job. During the tax year, Dorothy earned $8,200. Her parents also provide some support for her and claim her on their tax return. During the tax year, Dorothy paid $2,690 of her tuition bill and her parents paid $2,690. Dorothy also paid for her own books, which cost $540. Her parents helped her by paying part of her rent and grocery bill. After reading about refundable tax credits, Dorothy realized that she, or her parents, were eligible to claim the American Opportunity Credit.

A) What is Dorothy’s filing status, standard deduction amount, and taxable income for the year? Remember that she is claimed on her parents’ tax return. (Round answers to 0 decimal place, e.g. 5275.)

Dorothy’s filing status is single.

Standard deduction amount is $ _________?

Taxable income for the year is $ _________?

B) How much tax will be assessed to Dorothy based on her taxable income calculated in the previous question? (Round answers to 0 decimal place, e.g. 5275.)

Based on her taxable income, the amount of tax payable is $_________?

C) If Dorothy were to be able to claim the American Opportunity Credit, how much would the refundable and non refundable portions of the credit total? Can Dorothy claim the American Opportunity Credit? (Round answers to 0 decimal place, e.g. 5275.)

Refundable portion of credit total is $ ________?

Non-refundable portion of credit total is $ ________?

Dorothy cannot claim the American Opportunity Credit.

Answer 1

The following are the IRS rules about eligibility for American Opportunity Credit(AOTC):

• The student must be Stuying any recognized educational credential like degree
• He should be enrolled for at least half of the academic year which begins at the subsequent tax year.
• He should not have completed his initial four years of higher education by the time next tax year starts
• He shouldn't have claimed the AOTC or its earlier version 'Hope credit' for a period of more than 4 yers
• He should not a drug victim felony at the start of the tax year.

A)

The filing status for Dorothy is Single.

The standard deduction amount for Dorothy is $2,500.

It is calculated as 100% of the first $2000 = $2,000 and 25% of the next $2000 = $500 which totals $2,500 credit available.

Dorothy's taxable income:

Dorothy has the following expenses which are eligible to deduct

a. Material expenses of $540

Dorothy's taxable income = $8200 - $540 = $7,660

B)

Tax payable by Dorothy:

Dorothy's taxable income as computed earlier = $7,660

The tax rate applicable to Dorothy = 10%

So, Dorothy's tax liability = $7,660 * 10% = $766

C) Eligibility, computation of refundable and non-refundable portion of AOTC for Dorothy:

As computed in question A, Dorothy's eligible tax credit = $2,500

As per the rules prescribed for AOTC, only 40% of the eligible credit is refundable whereas the rest of the credit is non-refundable.

So, Dorothy's refundable credit = $2,500*40%= $1,000

=> Dorothy's non-refundable portion of credit = $2,500-$1,000 = $1,500

Dorothy can not claim American opportunity tax credit since it is evident from the facts that she is a dependent (Since her parents provided a half part of her expenses)

If her parents have any assessed tax liability, they can avail the credit as computed above.