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Service Academy Cadets and the American Opportunity Credit

Taxes Military Pay and Benefits College Planning

Cadets and Midshipmen at America's Military Academies May Qualify

Generally speaking, a service academy student's educational expenses are fully funded...with one exception. Books. And due to that, those cadets and midshipmen may be eligible for the American Opportunity Credit (AOC). On top of that they may be eligible for the refundable portion of the AOC.

How Does it Work?

To be eligible for the AOC the student must have qualifying education expenses. The following expenses qualify under the rules for the AOC

  • Tuition and Fees
  • Books (if required for enrollment or attendance)

Cadets and midshipmen at service academies do not pay tuition or fees so there is no AOC consideration there. They do however, pay for books and to my recollection, they are not optional (few things are at a service academy).

The result? A cadet or midshipman could have qualified education expenses in regard to the AOC.

What is the American Opportunity Credit?

The AOC is a credit (which means a dollar for dollar reduction in taxes) of up to $2,500.  Specifically, the AOC is calculated on 100% of the first $2,000 in qualified expenses and 25% of the next $2,000 in qualified expenses. So, in the case of service academy cadets and midshipmen, 100% of the amount spent on books will likely be used in calculating the credit.

Who Claims the Credit?

An individual can claim the credit for expenses paid for himself or herself, the taxpayer's spouse or the taxpayer's dependents.

To be considered a dependent one of the key factors considered is support provided. To qualify as a dependent the parent must provide more than 1/2 of the child's support in the case of college students. As service academies provide room and board, tuition, and monetary compensation it is unlikely that a parent will provide the requisite 50%+ of support.

With that said, the parent may be able to make the case that the child is a dependent for the year he or she enters a service academy, but starting the spring semester of his or her Freshman year it is my opinion that the cadet or midshipman will NOT be a dependent.

This works out for the better.

Restrictions on Claiming the Credit

There are some limitation concerning drug convictions and full-time student status, but a cadet or midshipman won't have problems with this.

A bigger concern is for the parent trying to take the credit the year the child enters an academy. That year the cadet or midshipman may be a dependent so the parent has the "right" to claim the credit. However, for many retired military officers, their income is too high (Adjusted Gross Income greater than or equal to $180,000) to be able to claim the credit. In this case, it may make more sense to try to prove the child was not a dependent so that he or she can claim the refundable portion of the credit or it might make more sense to skip it for the semester as the credit is based on calendar years, not school years. Even after skipping the credit for the first semester, there are still 4 years in which the credit can be claimed. You'll have to look at it both ways to determine which is best for you.

Refundable Credits

One of the great things about the AOC is that $1,000 of the credit is refundable (as long as no one CAN claim you as a dependent). Refundable credits may allow you to get a larger refund than what was withheld from your pay. Let's look at an example.

             

Base Pay for Service Academy Cadet/Midshipman$13,052
Standard Deduction$12,000
Taxable Income$1,052
Tax$105
Taxes Withheld$305
Books Expenses$500
Total Refund ($500 + $200)$700


As you can see, even though $305 was withheld from pay and the total tax bill was $105, the refund was $700 or $500 more than it would be without the credit.

Warning!

This is my interpretation of the law based on my understanding of service academy compensation and the tax code.  I haven't seen this written about anywhere else.  If you want to go down this path, do your own due diligence or work with a financial and/or tax advisor that specializes in dealing with military members.


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