Joe, who is single with modified AGI of $84,000, is sending his son to his first year of college. The total tuition and related payments during the year amounted to $18,000. Joe has not taken advantage of any other type of tax benefit related to educational expenses. His American Opportunity Tax Credit is ____________.
A) $0.
B) $1,000.
C) $1,500.
D) $2,500.
C) $1,500.
The credit is 100% of the first $2,000 and 25% of the next $2,000 of educational expenses. [($2,000 × 100%) + ($2,000 × 25%) = $2,500]. However, the credit must be phased out based on Joe's AGI. ($84,000 - $80,000)/10,000 × $2,500 = $1,000. $2,500 - 1,000 = $1,500 allowable credit.
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