Anie graduates from high school in 2018 and enrolls in college in the fall. Her parents (who file a joint return) pay $4,000 for her tuition and fees. a. Assuming Janie's parents have AGI of $170,000, what is the American Opportunity tax credit they can claim for Janie?

The American Opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. A taxpayer whose modified adjusted gross income (MAGI) is $80,000 or less (and $160,000 or less for joint filers) can claim the credit for the qualified expenses of an eligible student.

A MAGI between $80,000 and $90,000 will have a partial credit at a reduced rate applied for single taxpayer while for married couples that file jointly between $160,000 and $180,000.

To calculate for Janie whose parents fall under the partial or phased out credit, the formula below is applied:

Credit = Credit without phaseout * {(MAGI limit - MAGI) / Phaseout Range}

Janie's tuition and fees is $4,000

∴ credit without phaseout = 100% of 2000 + 25% of 2000 = $2500

MAGI limit = $180,000

MAGI = $170,000

Phaseout limit = $180,000; phaseout threshold = $160,000

∴  Phaseout range = $20,000

Credit to be claimed = 2500 * {{180000 - 170000) / 20000}

= 2500 (10000/20000)

=$1,250

Explanation: