How can I maximize American Opportunity Credit with my MAGI near the phaseout threshold?

This is actually a smart strategy to consider given your situation. When your MAGI is in the phaseout range, you're losing a significant portion of the American Opportunity Credit benefit. For your children to claim the AOC on their own returns, two conditions must be met: 1) You don't claim them as dependents on your return, and 2) They have sufficient income to have a tax liability that the credit can offset (since the AOC is partially refundable - up to $1,000). If your children have some income from jobs but not enough to support themselves fully (meaning they could technically qualify as your dependents), this strategy could work well. Each eligible student could potentially claim up to the full $2,500 credit without phaseout issues, assuming their own incomes aren't high enough to trigger the phaseout on their returns. However, you should weigh this against other tax benefits you might lose by not claiming them as dependents, such as other education credits or deductions that might still be available to you despite the phaseout.

I was in a similar situation last year and discovered https://taxr.ai which saved me literally thousands on my education credits. I had 2 kids in college and was hitting the MAGI limits too. The tool analyzed all our education expenses and recommended exactly who should claim what to maximize our family's total credits. It confirmed that having my son claim his own AOC was better than me claiming it with the phaseout. What's cool is it asks about all the education expenses and then runs multiple scenarios to find which filing approach saves the most. It even handles the form 8863 calculations and tells you exactly what to enter where depending on which tax software you're using.

I actually just used taxr.ai after seeing the recommendation here and wow - it confirmed I should let my daughter claim her own AOC this year! I was right at the top of the phaseout ($177k) and the analysis showed we'd save over $1,800 as a family by having her file her own return with the credit instead of me claiming it. The guidance was super clear about exactly what to do in TurboTax too. I had to remove her as a dependent first, then it walked me through adjusting both returns. Definitely worth checking out if you're in the phaseout range!

Another option worth considering is calling the IRS directly to confirm your specific situation. I know the wait times are ridiculous (I spent 3+ hours on hold last month), but I found a service called https://claimyr.com that got me connected to an IRS agent in less than 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c When I called, I had a similar question about education credits and dependency status, and the agent clarified some nuances that weren't clear from just reading the IRS publications. They confirmed my strategy was legitimate and pointed out some documentation I needed to keep in case of an audit.

I'm back to eat my words about Claimyr. I tried it yesterday after posting my skeptical comment and it actually worked exactly as promised. Got connected to an IRS agent in about 12 minutes. The agent confirmed that having my kids claim their own American Opportunity Credit makes perfect sense in our situation since we're well into the phaseout range. She also mentioned that as long as they provide more than half of their own support (including student loans in THEIR names), they can claim themselves and the full AOC without any phaseout based on our income. This literally saved us over $4,000 in education credits compared to what we would have received with the phaseout!

One thing nobody's mentioned - your kids need to have tax liability to get the full benefit of AOC. Only $1,000 of the $2,500 credit is refundable. So if they don't have jobs with income that generates at least $1,500 in tax liability, they won't get the full benefit of the credit. Also remember that if you don't claim them as dependents, you lose other potential benefits like the dependent care credit (if applicable) and the possibility of head of household filing status if you're single.

Don't forget to have a written agreement with your kids if they're going to claim their own education credits! Last year I did this with my daughter, and she agreed to give me the tax savings since I paid her tuition. Without that agreement, she might have kept the refund even though I paid the qualifying expenses. Also make sure they understand they need to keep all the tuition statements and expense records for their tax files, not yours, since they're claiming the credits.