If your child is currently attending college, you may be able to claim the American Opportunity credit on your 2016 income tax return. However, if your income is too high, you will not qualify for the credit – but your child might.

There is one potential downside to your dependent child claiming the American Opportunity Credit. You must forgo your dependency exemption for him or her, and your child cannot take the exemption.

American Opportunity Credit Limits
The maximum American Opportunity credit, per student, equates to $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.

The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phase-out range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It is completely eliminated when MAGI exceeds the top of the range.

Calculating the Numbers
If your American Opportunity credit is partially or fully phased out, you should assess whether there is a tax benefit for the family if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child, so it’s important to run the numbers beforehand.

Dependency exemptions are also subject to a phase-out, so you might lose the benefit of your exemption, whether your child claims the credit or not. The 2016 adjusted gross income (AGI) thresholds for the exemption phase-out are $259,400 for singles, $285,350 for heads of households, $311,300 for married filing jointly, and $155,650 for married filing separately.

If your exemption is fully phased out, there is likely no downside to your child claiming the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you would receive from the exemption to determine which break will provide the greatest overall savings.

Check with Your Advisor
Your tax advisor can help you run the numbers and can provide more information about whether you qualify for the American Opportunity credit and if you or your dependent should claim it.