529 or Other for College Savings?

[38Chevy454]

My wife and I want to contribute some money to my 10 year old niece and 8 year old nephew for college savings. Probably $5K each kid, $10K total; might go up to $10K per kid depending how taxes work out this year

Here in New Mexico, we have a 529 plan that also allows for full state tax deduction. That is nice and would have some benefit for us, as right now we are still working. Niece and nephew are good kids and college is a definite plan for them. Both doing great in school and attend a STEM (science, technology, engineering and math) charter school where they are in top of their classes.

I know sometimes people use a Roth account instead, or other savings tools. It seems to me the NM 529 plan is going to be hard to beat from financial aspect. It has full state tax deductibility for us now, assets grow tax free, has tax free withdrawl for the college expenses, and has pretty good flexibility if things change. Has decent low-fee index funds to invest in, administered by Oppenheimer Funds. Seems like not much to lose and only to benefit.

Here is a summary of the plan:
https://www.theeducationplan.com/OFI529/PN/generated/en_us/PrimaryNavigation_09-20-07-162335.xml

I appreciate any opinion and discussion. Interested to learn what others have done and how you evaluated the options. Thanks for the help, Terry

 

[rodi]

I chose to go the 529 route for my kids for the following reasons:

- money is technically in the owners name, with the child designated, but not owner. This is different than some of the other college savings vehicles that give the child full access to funds on their 18th birthday.

- money can be switched from one child to another. So if one child goes to a local community college, and then a local university on scholarship, and the other child goes to a private school with no scholarship - you'd be able to take the money from the child that didn't need the $$ and use it for the kid that needed the $$.

I'm assuming my kids are going to college - but that' more than 5 years from now and a lot could happen. I like the fact that if a child doesn't go to college, I can reclaim the money (with a penalty on the gains) for myself. Or if one of my kids gets a deal like our niece got - full ride to nursing school (free tuition, dorm, stipend) in exchange for 2 years of work at that hospital... - I'd be able to divert the money to the other child.

 

[donheff]

I went with 529's also.

 

[retire2020]

529 plans for all three kids for the same reasons rodi mentioned. I had about 17K in UGMA account for my daughter but I closed it last year and transferred that money in her 529.

 

[38Chevy454]

Sounds like the 529 plan is the way so far.

Not sure it affects the discussion, but my niece and nephew live in CO. The NM plan lets the money be used for any US or even some foreign schools, and the beneficiary can be almost anyone you want. It does not have be your own kid and your own state universities.

 

[fh2000]

I never converted our 2 kids' UTMA/UGMA accounts. The risk that people talk about for this type of account is what if kids take the money and buy cars instead.

I am lucky that my 2 kids probably will not do that. DD is a sophomore and have enough to finish college. DS is waiting for college acceptance letters now (got one already so going to college for sure).

I file their individual taxes for them since they were little so their account gains did not incur much tax if at all.

 

[sengsational]

Use the Roths for yourself and the 529s for the kids (but only after your retirement is covered). The younger the kids, the more advantage, since the gains are not taxed for tuition, room and board, books, etc. Avoid UGMA because that shows as an asset of the child and will be 'taxed' by the FAFSA formula at like 25% or something. Since you are not the parent, I'm not sure if your 529 will even show in the FAFSA, at least in the first year. What a nice aunt and uncle you are!!

 

[youbet]

Coverdell up to the $2k limit then 529b.

 

[hausfrau]

We have a 529 plan for our 5 y.o. kid. We already fund our retirement plans (401K, Roth). We have about 26K in there right now . Most of it was funded when I worked FT. Now we just put $200/mo. in there, but I'm thinking of putting more money in there rather than our taxable accounts. I think the chances of her going to college are greater than the possible 10% penalty we may incur.

I'm worried about college costs. I'm not sure college tuition will really go down all that much in the future. There are still an awful lot of full pay kids out there. I started my kiddo's 529 plan five years ago and things haven't changed that much. I'm not really counting on things changing that much in the next 13 years either.

 

[Mulligan]

Coverdell up to the $2k limit then 529b.

Are you referring to the "Opportunity Credit", Youbet? That by far is the most bang for the buck. You get the additional $500 to $2500, but the last $500 is not dollar for dollar. I believe income restriction is $80k single and $160k couple with quick phase outs above that. I almost screwed up with this. You do not want to overload your 529 where you have to use it and not the opportunity credit as it is a dollar for dollar reduction in taxes. You also cannot use them both for the same expenses.

 

[karluk]

We have a 529 plan for our 5 y.o. kid. We already fund our retirement plans (401K, Roth). We have about 26K in there right now . Most of it was funded when I worked FT. Now we just put $200/mo. in there, but I'm thinking of putting more money in there rather than our taxable accounts.

Overfunding a 529 plan can easily backfire, so don't overdo it. I'm sure most people in the general population are in no danger whatsover of overfunding a college savings plan, but the members of er.org tend to be aggressive savers so it's important to be aware of the pitfalls.

1. Most people know about the taxes and 10% penalty on unqualified distributions. Both can bite you. You have put after-tax money into a tax shelter in the hopes of not paying additional taxes later. But if you need to take unqualified distributions, you end up not only owing the 10% penalty but you've also converted what could have been tax-favored long term capital gains into 529 profits that will get taxed at the higher ordinary income rates.

2. Even qualified distributions may result in taxes owed. That's because you can't take full advantage of educational tax credits by using withdrawals from a 529 plan. IRS rules say that you can take the tax credit or the tax-free 529 withdrawal, but not both. For the American Opportunity Credit, for example, unless you can fund the first $4,000 of your child's college expenses from money outside the 529 plan, you will have to pay taxes on $4,000 of withdrawals in order to claim the American Opportunity Credit. Again, this is taxed at ordinary income tax rates, not as taxed-advantaged LTCG. You have avoided the 10% penalty in this case but not the unfavorable tax treatment.

3. Costs matter. Every 529 plan charges some expenses in addition to the underlying expenses of the mutual funds you are holding. The extra costs vary widely depending on which state's plan you are enrolled in, but the costs are always higher than holding low cost index funds in an IRA or taxable account. You won't get any report of how much the extra costs are eating away at your gains, but over time you can expect the 529 plan to do worse than making the same investments elsewhere, simply because of the extra costs.

 

[Mulligan]

2. Even qualified distributions may result in taxes owed. That's because you can't take full advantage of educational tax credits by using withdrawals from a 529 plan. IRS rules say that you can take the tax credit or the tax-free 529 withdrawal, but not both. For the American Opportunity Credit, for example, unless you can fund the first $4,000 of your child's college expenses from money outside the 529 plan, you will have to pay taxes on $4,000 of withdrawals in order to claim the American Opportunity Credit. Again, this is taxed at ordinary income tax rates, not as taxed-advantaged LTCG. You have avoided the 10% penalty in this case buy not the unfavorable tax treatment.

I am very tight on this. Last year, I had to drop $6k in my child's 529, to get my state AGI under income limits to snag a $2500 pension exemption tax credit. If I understand correctly there is enough flexibility in the 529 plans legitimate use of funds that I can still pull this off without penalty. The opportunity credit is very narrow in uses of it. I may have to forego the last $500 of the credit and just take the dollar for dollar $2000 credit.

 

[hausfrau]

Overfunding a 529 plan can easily backfire, so don't overdo it. I'm sure most people in the general population are in no danger whatsover of overfunding a college savings plan, but the members of er.org tend to be aggressive savers so it's important to be aware of the pitfalls.

1. Most people know about the taxes and 10% penalty on unqualified distributions. Both can bite you. You have put after-tax money into a tax shelter in the hopes of not paying additional taxes later. But if you need to take unqualified distributions, you end up not only owing the 10% penalty but you've also converted what could have been tax-favored long term capital gains into 529 profits that will get taxed at the higher ordinary income rates.

2. Even qualified distributions may result in taxes owed. That's because you can't take full advantage of educational tax credits by using withdrawals from a 529 plan. IRS rules say that you can take the tax credit or the tax-free 529 withdrawal, but not both. For the American Opportunity Credit, for example, unless you can fund the first $4,000 of your child's college expenses from money outside the 529 plan, you will have to pay taxes on $4,000 of withdrawals in order to claim the American Opportunity Credit. Again, this is taxed at ordinary income tax rates, not as taxed-advantaged LTCG. You have avoided the 10% penalty in this case but not the unfavorable tax treatment.

3. Costs matter. Every 529 plan charges some expenses in addition to the underlying expenses of the mutual funds you are holding. The extra costs vary widely depending on which state's plan you are enrolled in, but the costs are always higher than holding low cost index funds in an IRA or taxable account. You won't get any report of how much the extra costs are eating away at your gains, but over time you can expect the 529 plan to do worse than making the same investments elsewhere, simply because of the extra costs.

All very good points. Thank you. In the back of my mind I think we should be prepared for the cost of private college, just in case. Maybe I'll just fund enough for a state college in the 529 and call it a day.

 

[rodi]

Overfunding a 529 plan can easily backfire, so don't overdo it. I'm sure most people in the general population are in no danger whatsover of overfunding a college savings plan, but the members of er.org tend to be aggressive savers so it's important to be aware of the pitfalls.

1. Most people know about the taxes and 10% penalty on unqualified distributions. Both can bite you. You have put after-tax money into a tax shelter in the hopes of not paying additional taxes later. But if you need to take unqualified distributions, you end up not only owing the 10% penalty but you've also converted what could have been tax-favored long term capital gains into 529 profits that will get taxed at the higher ordinary income rates.

2. Even qualified distributions may result in taxes owed. That's because you can't take full advantage of educational tax credits by using withdrawals from a 529 plan. IRS rules say that you can take the tax credit or the tax-free 529 withdrawal, but not both. For the American Opportunity Credit, for example, unless you can fund the first $4,000 of your child's college expenses from money outside the 529 plan, you will have to pay taxes on $4,000 of withdrawals in order to claim the American Opportunity Credit. Again, this is taxed at ordinary income tax rates, not as taxed-advantaged LTCG. You have avoided the 10% penalty in this case but not the unfavorable tax treatment.

3. Costs matter. Every 529 plan charges some expenses in addition to the underlying expenses of the mutual funds you are holding. The extra costs vary widely depending on which state's plan you are enrolled in, but the costs are always higher than holding low cost index funds in an IRA or taxable account. You won't get any report of how much the extra costs are eating away at your gains, but over time you can expect the 529 plan to do worse than making the same investments elsewhere, simply because of the extra costs.

To clarify this - please correct me if I'm wrong.

If you take unqualified distributions from a 529 the 10% penalty is ONLY on the earnings/gains, not the initial (already taxed) contributions. Similar to a ROTH.

 

[karluk]

To clarify this - please correct me if I'm wrong.

If you take unqualified distributions from a 529 the 10% penalty is ONLY on the earnings/gains, not the initial (already taxed) contributions. Similar to a ROTH.

Yeah, you're right, rodi. I realized that I wasn't being completely accurate when I wrote my original post, but I decided to sacrifice precision in order to avoid making my post unnecessarily complicated. Perhaps a poor decision.

For my situation, the fact that the tax is due only on investment gains shows up dramatically in the accounts of my two children. DD is currently a junior in college, so her account has been more conservatively invested and has relatively little investment gains subject to possible tax. DS is a graduating high school senior, so his account has been more aggressively invested and for a longer time. He has much higher investment gains. I am currently uncertain if I will need to pay taxes on some of his withdrawals in order to claim the American Opportunity Credit. If I do, the tax hit will be higher than it would be for DD, because he has a much higher proportion of investment gains to untaxable contributions.

 

[hausfrau]

Yeah, you're right, rodi. I realized that I wasn't being completely accurate when I wrote my original post, but I decided to sacrifice precision in order to avoid making my post unnecessarily complicated. Perhaps a poor decision.

It's still a valid point since I believe the unqualified earnings are taxed at ordinary rates instead of capital gain rates. Since DD is an only child, we have no one else to transfer the money to either.

I think I'll leave our contributions as is and concentrate on taxable savings.

 

[38Chevy454]

Thanks to all for some great discussion on this. Very helpful to increase my understanding, and hopefully good for many others as well.

Use the Roths for yourself and the 529s for the kids (but only after your retirement is covered). The younger the kids, the more advantage, since the gains are not taxed for tuition, room and board, books, etc. Avoid UGMA because that shows as an asset of the child and will be 'taxed' by the FAFSA formula at like 25% or something. Since you are not the parent, I'm not sure if your 529 will even show in the FAFSA, at least in the first year. What a nice aunt and uncle you are!!

I am already maxing out our pre-tax retirement savings plans, and working to have additional after-tax savings as well. Fortunately (or is that unfortunately??), unless something changes my niece and nephew will not get any need-based college money. They may even have tough time to qualify for loans since both my sister and bro-in-law have good jobs with too much income to potentially qualify.

Coverdell up to the $2k limit then 529b.

Are you referring to the "Opportunity Credit", Youbet? That by far is the most bang for the buck. You get the additional $500 to $2500, but the last $500 is not dollar for dollar. I believe income restriction is $80k single and $160k couple with quick phase outs above that. I almost screwed up with this. You do not want to overload your 529 where you have to use it and not the opportunity credit as it is a dollar for dollar reduction in taxes. You also cannot use them both for the same expenses.

In my case the full state tax deduction seems to be more valuable? If I understand the Coverdell correctly it is like an IRA, all after-tax money? So there is no tax benefit for me now. I work hard for my money and I work even harder to pay as little in taxes as i have to The 529 gives the same tax-free asset growth and tax-free withdrawl capability, so why is the Coverdell better?

Overfunding a 529 plan can easily backfire, so don't overdo it. I'm sure most people in the general population are in no danger whatsover of overfunding a college savings plan, but the members of er.org tend to be aggressive savers so it's important to be aware of the pitfalls.

1. Most people know about the taxes and 10% penalty on unqualified distributions. Both can bite you. You have put after-tax money into a tax shelter in the hopes of not paying additional taxes later. But if you need to take unqualified distributions, you end up not only owing the 10% penalty but you've also converted what could have been tax-favored long term capital gains into 529 profits that will get taxed at the higher ordinary income rates.

2. Even qualified distributions may result in taxes owed. That's because you can't take full advantage of educational tax credits by using withdrawals from a 529 plan. IRS rules say that you can take the tax credit or the tax-free 529 withdrawal, but not both. For the American Opportunity Credit, for example, unless you can fund the first $4,000 of your child's college expenses from money outside the 529 plan, you will have to pay taxes on $4,000 of withdrawals in order to claim the American Opportunity Credit. Again, this is taxed at ordinary income tax rates, not as taxed-advantaged LTCG. You have avoided the 10% penalty in this case but not the unfavorable tax treatment.

3. Costs matter. Every 529 plan charges some expenses in addition to the underlying expenses of the mutual funds you are holding. The extra costs vary widely depending on which state's plan you are enrolled in, but the costs are always higher than holding low cost index funds in an IRA or taxable account. You won't get any report of how much the extra costs are eating away at your gains, but over time you can expect the 529 plan to do worse than making the same investments elsewhere, simply because of the extra costs.

Thanks for the extra detail on withdrawls and potential tax effects. I will not be doing this as hidden, my sister and bro-in-law will be fully aware so that we don;t screw up the withdrawl process.

 

[youbet]

Are you referring to the "Opportunity Credit", Youbet? That by far is the most bang for the buck. You get the additional $500 to $2500, but the last $500 is not dollar for dollar. I believe income restriction is $80k single and $160k couple with quick phase outs above that. I almost screwed up with this. You do not want to overload your 529 where you have to use it and not the opportunity credit as it is a dollar for dollar reduction in taxes. You also cannot use them both for the same expenses.

No. I'm talking about the Coverdell Educational Savings Acct. It's an IRA-like savings vehicle. If your income is below an amount (around $170k MFJ if I recall correctly - you can Google) you can invest $2k per child per year. Once in the acct, you manage it DIY like a self-directed Roth IRA. Withdrawals are tax free (like a ROTH) as long as the money is spent on the child's education, with a very broad definition of "education." Unlike a 529b, money can be used for K through grad school expenses including home computers, tutoring, etc. So, much more flexibility.

The big downside to a Coverdell is the $2k per child annual limit. So I fund that first, then put whatever else I can afford to give to the grand kids into their 529b. Usually the 529b amount is the $20k limit Illinois puts on state tax deductibility.

People who do only 529b's are missing a good deal with the Coverdells. Any brokerage house that does IRA's will do a Coverdell. I use Schwab.

 

[youbet]

In my case the full state tax deduction seems to be more valuable? If I understand the Coverdell correctly it is like an IRA, all after-tax money? So there is no tax benefit for me now. I work hard for my money and I work even harder to pay as little in taxes as i have to The 529 gives the same tax-free asset growth and tax-free withdrawl capability, so why is the Coverdell better?

I didn't say a Coverdell was better. I said a combo of Coverdell + 529b was working best for us. You have to look at your own situation and decide.

You are correct that money deposited in a Coverdell does not get you a state tax deduction. But, in Illinois, we can only deduct a total of $20k of 529b contribution regardless of the number of children you are funding and the total amount you contribute. For example, a total $30k 529b contribution still nets only a $20k deduction which is the max allowed. I do the 529b $20k and for the next $2k per child I use the more flexible Coverdell.

 

[sengsational]

It was a long time ago, but I think I passed-over the Coverdells since I could drop $50k per kid into the 529s without tax consequences. Something about 5 year averaging. Got lucky on a real estate deal and dropped the profits into the 529s. One account is drained now, but DD has an engineering job lined-up. DD2 is at a state school, so won't go through her whole account balance. I've been yanking $ out up to the amounts of scholarships and grants, which escape the 10% penalty, but I think my neices, nephews, or (some day) grandchildren might have a benefactor, hehe!

 

[Mulligan]

38Chevy--- the American Opportunity Credit in my opinion is the first one you choose over anything. It is a dollar for dollar FEDERAL tax credit on first $2k, then I believe 25 cents on the dollar for the next $500 credit. And even if you owe no taxes you can still claim some of it.. Their are income limits which you may need to google to confirm,but I believe it phases out at 80 AGI single and $160 AGI couple. This is yearly for 4 years... A credit is way better than a deduction in my eyes, but you have to pay this out of pocket, then get the refund through taxes. The child also has to be a dependent or otherwise I believe the credit goes to him/her. It will have to be approved however again past 2017, but it's been around for awhile...

I apologize for wasting electronic space, but I couldn't get link to work on my IPAD so I copied the key info and pasted.

American Opportunity Tax Credit: Questions and Answers
Q1. Have there been any changes in the past few years to the tax credits for college expenses?
A. Yes. The American opportunity tax credit, which expanded and renamed the already-existing Hope scholarship credit, can be claimed in tax-years 2009 through 2017 for expenses paid for tuition, certain fees and course materials for higher education .

Q2. The Hope scholarship credit originally applied only to the first two years of college. Has that changed?
A. Yes. The American opportunity tax credit can be claimed for expenses for the first four years of post-secondary education.
Q3. How does the American opportunity tax credit differ from the Hope scholarship credit and Lifetime Learning credit?
A. Unlike the other education tax credits, the American opportunity tax credit includes expenses for course-related books, supplies and equipment that are not necessarily paid to the educational institution. It also differs from the Hope scholarship credit because it allows the credit to be claimed for four years of post-secondary education instead of two.
Q4. How much is the American opportunity tax credit worth?
A. It is a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. Also, 40% of the credit (up to $1,000) is refundable. This means you can get it even if you owe no tax.
Q5. What are qualified expenses for purposes of the education tax credits?
A. In general, qualified expenses for the education tax credits include tuition and required fees for the enrollment or attendance at an eligible post-secondary educational institution. To be creditable, the expenses paid during a taxable year must relate to: (1) an academic period that begins in the same taxable year; or (2) an academic period that begins in the first three months of the following taxable year. See Publication 970, Tax Benefits for Education.
The following expenses do not qualify:
Room and board.
Transportation.
Insurance.
Medical expenses.
Student fees unless required as a condition of enrollment or attendance.
Same expenses paid with tax-free educational assistance.
Same expenses used for any other tax deduction, credit or educational benefit.
Q6. What additional education expenses qualify for the American opportunity tax credit?
A. For the American opportunity tax credit, qualified expenses have been expanded to include expenditures for course materials, as well as tuition and required fees. For this purpose, the term "course materials" means books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Some or all of these expenses will be recorded on Form 1098-T, Tuition Statement. The student should receive a Form 1098-T from the educational institution that the student attended. If the student does not receive a Form 1098-T, the student should contact the educational institution and request the form.
Q7. Does an expenditure for a computer qualify for the American opportunity tax credit?
A. Whether an expenditure for a computer qualifies for the credit depends on the facts. An expenditure for a computer would qualify for the credit if the computer is needed as a condition of enrollment or attendance at the educational institution.
Q8. How is the American opportunity tax credit calculated?
A. Taxpayers will receive a tax credit based on 100 percent of the first $2,000, plus 25 percent of the next $2,000, paid during the taxable year for tuition, fees and course materials.
Q9. How will the American opportunity tax credit affect my income tax return?
A. You will be able to reduce your tax liability by one dollar for each dollar of credit for which you're eligible. If the amount of the American opportunity tax credit for which you're eligible exceeds your tax liability, the excess will be refunded to you up to the lesser of 40 percent of the credit or $1,000.
Q10. Who can claim the American opportunity tax credit?
A. Generally, a taxpayer whose modified adjusted gross income is $80,000 or less ($160,000 or less for joint filers) can claim the credit for the qualified expenses of an eligible student. The credit is reduced if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot claim the credit.
Q11. What is "modified adjusted gross income" for the purpose of the American opportunity tax credit?
A. It is the taxpayer's adjusted gross income increased by foreign income that was excluded, and by income excluded from sources in Puerto Rico or certain U.S. possessions.
Q12. Who is an eligible student for the American opportunity tax credit?
A. For the American opportunity tax credit, an eligible student is a student who: (1) is enrolled in a program leading toward a degree, certificate or other recognized post-secondary educational credential; (2) has not completed the first four years of post-secondary education as of the beginning of the taxable year; (3) for at least one academic period is carrying at least ½ of the normal full-time work load for the course of study the student is pursuing; and (4) has not been convicted of a felony drug offense.
Q13. If a student was an undergraduate during the first part of the taxable year and became a graduate student that same year, will the student qualify for the American opportunity tax credit?
A. If a student has not completed the first four years of post-secondary education as of the beginning of the taxable year, and has not claimed the Hope scholarship credit and/or the American opportunity tax credit for more than four taxable years, the student can claim the American opportunity tax credit for qualified expenses paid during the entire taxable year.
Q14. I'm just beginning college this year. Can I claim the American opportunity tax credit for all four years I pay tuition?
A. Generally, yes. Under current law, the credit will be available through tax-year 2017.
Q15. How does a taxpayer claim an education tax credit?
A. A taxpayer claims an education tax credit by completing Form 8863, Education Credits, and attaching it to Form 1040 or 1040A.
Q16. Can I claim the tuition and fees tax deduction in addition to claiming the American opportunity tax credit?
A. No. You cannot claim the tuition and fees tax deduction in the same taxable year that you claim the American opportunity tax credit or the Lifetime Learning credit. You must choose between taking an education tax credit or taking the deduction for tuition and fees. You also cannot claim the tuition and fees tax deduction if anyone else claims the American opportunity tax credit or the Lifetime Learning credit for you in the same taxable year. A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. Although the credit will usually result in greater tax savings, taxpayers should calculate both the tax credit and the deduction on the tax return to see which is most beneficial. Often, tax software will automatically compare the tax result, from taking the education credit or taking the deduction, for you.
Q17. What is Form 1098-T, Tuition Statement, and who provides it?
A. Educational institutions are required to file a Form 1098-T, Tuition Statement, with the IRS and to provide the a copy of the form to the student, for each enrolled student for whom there is a reportable transaction. A reportable transaction includes payments received, amounts billed or refunds made for tuition and related expenses. For the Form 1098-T to be accurately prepared, the educational institution must address boxes 8 and 9. Note that box 8 will be checked if the student was enrolled at least half-time, and box 9 will be checked if the student was enrolled as a graduate student. There are some exceptions where an educational institution is not required to file and provide the Form 1098-T. These exceptions include:
Courses for which no academic credit is offered, even if the student is otherwise enrolled in a degree program.
Nonresident alien students, unless the student requests the institution to file Form 1098-T.
Students whose tuition and related expenses are waived entirely or paid entirely with scholarships or grants.
Students whose tuition and related expenses are covered by a formal billing arrangement with the student’s employer or a government agency such as the Department of Veterans Affairs or the Department of Defense.
Q18. How do I know if my school is an eligible institution?
A. A student can check with the educational institution. However, this link from the Department of Education, http://ope.ed.gov/accreditation/, shows all accredited schools. If your school is found using this link, then it is an eligible institution and you can claim the American opportunity tax credit.
Q19. Can F-1 Visa students claim the AOTC?
A. For most alien individuals present in the U.S. on an F-1 Student Visa, the answer is no. Generally speaking, the time spent by an alien individual studying in the U.S. on an F-1 Student Visa would not count toward determining whether he or she was a resident alien under the substantial presence test for federal tax purposes. Thus, if you are an alien individual with an F-1 Student Visa, you are probably a nonresident alien. In general, if you are a nonresident alien for any part of the year, you do not qualify for the AOTC.
However, your parents may qualify for the credit even if you are a nonresident alien student if they claim you as a dependent on their tax return. If you are a U.S. resident filing Form 1040, and your parents do not claim you as a dependant, and you meet all of the other requirements for the credit, you may qualify for the credit.
Q20. What if the student’s return was incorrectly prepared and filed by a professional tax preparer?
A. The IRS urges you to choose a tax preparer wisely. You are legally responsible for what’s on your tax return, even if it is prepared by someone else. For more information, read IRS’ Tips for Choosing A Tax Return Preparer.

Related Items:
Tax Breaks for Education: Information Center
IR-2009-78, Special IRS Web Section Highlights Back-to-School Tax Breaks; Popular 529 Plans Expanded, New $2,500 College Credit Available
Fact Sheet 2009-12, How 529 Plans Help Families Save for College and How the American Recovery and Reinvestment Act of 2009 Expanded 529 Plan Features
529 Plans: Questions and Answers
American Opportunity Credit
IRS Information Related to the American Recovery and Reinvestment Act of 2009

Page Last Reviewed or Updated: 09-Dec-2013