AOTC refundability depends on claimant's child status

Plain-English summary

Chief Counsel addressed when the refundable portion of the American Opportunity Tax Credit is unavailable under the child-status rules. The credit may cover qualified education expenses of the taxpayer or a properly claimed dependent. The age, support, living-parent, and joint-return conditions determine whether the taxpayer claiming the credit is a child described in section 1(g). The 40 percent refundable portion is denied only when the claimant, rather than merely the student whose expenses support the credit, meets those child-status conditions.

Ruling snapshot

• Question: Do the child-status restrictions apply based on the taxpayer claiming the AOTC or the student who incurred the expenses?
• Outcome: Advice given, the restrictions apply to the claimant
• Key authorities: IRC §§ 1(g) and 25A(i)

Full text (IRS public release)

ID: CCA_2014072915142008 [Third Party Communication:

UILC: 25A.00-00 Date of Communication: Month DD, YYYY]

Number: 201509030
Release Date: 2/27/2015
From:
Sent: Tuesday, July 29, 2014 3:14:21 PM
To:
Cc:
Bcc:
Subject: Determining whether a portion of the American Opportunity Tax Credit is refundable

       This email responds to your inquiry concerning the circumstances under

which a portion of the American Opportunity Tax Credit (AOTC) is refundable. You
asked whether the AOTC is not refundable to a taxpayer who (1)(a) is under age 18 at
the end of his or her taxable year, or (b) is age 18 at the end of his or her taxable year
and has earned income that is less than one-half of his or her support for that year, or
(c) is over age 18 but not yet age 24 at the end of his or her taxable year, is a full-time
student, and had earned income that is less than one-half of his or her support for that
year; (2) had at least one living parent at the end of his or her taxable year, and (3) if
married, does not file a joint return with his or her spouse for that taxable year. In
particular, you asked whether these rules applied to a taxpayer claiming the credit only
if the taxpayer was the student who incurred the expenses.

        Section 25A(i) of the Internal Revenue Code, which is often referred to as the

American Opportunity Tax Credit, provides that the Hope Scholarship Credit that is
allowed under §25A(a)(1) may be increased and is partially refundable for certain
taxpayers in taxable years beginning after 2008 and before 2018. The AOTC may be
claimed with respect to qualified educational expenses described in § 25A(f)(1) and
(i)(3) of the taxpayer or any individual whom the taxpayer properly claims as a
dependent for a taxable year. Section 25A(f)(1)(iii). Section 25A(i)(5) allows 40 percent
of the AOTC to be refundable to a taxpayer but not if “such taxpayer is a child to whom
subsection (g) of section 1 applies for such taxable year.”

        The rules described above relating to the age of the taxpayer and the amount

of earned income, whether the taxpayer had a living parent, and whether the taxpayer
files a joint return, represent the conditions for determining whether an individual is a
child described in § 1(g) and, thus, whether the AOTC is non-refundable as provided in
§ 25A(i)(5). Importantly, those rules only apply to disallow a refund of the AOTC if the
taxpayer claiming the credit is a child who meets those conditions. For that reason, if
the taxpayer claiming the AOTC is a child described in § 1(g), the AOTC is non-
refundable.
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