Your 64-year-old client wants to fund a grandchild's college, gift the lake house to her son, and convert IRA distributions to charity. Three planning lanes, one return.
One credit per student per year. AOTC and LLC share a 2025 phaseout of $80,000-$90,000 single / $160,000-$180,000 MFJ. MFS disqualifies both.
AOTC. 100% of the first $2,000 + 25% of the next $2,000 = $2,500 max per student, 40% refundable. Requires first four years post-secondary, half-time minimum, degree-seeking, no felony drug conviction. Qualified: tuition, required fees, required books and materials.
LLC. 20% × up to $10,000 = $2,000 max per return, nonrefundable. Unlimited years, any post-secondary including job-skills courses, no degree or half-time requirement.
§529 plan. Contributions are not federally deductible (often deductible on the state return). Tax-deferred growth; qualified distributions tax-free for tuition, required fees, books, supplies, computer, and room/board if at least half-time. Extended uses: K-12 tuition up to $10,000/year per beneficiary; apprenticeship costs; $10,000 lifetime per beneficiary for student-loan principal/interest plus $10,000 per sibling.
Common mistakes
- Claiming both AOTC and LLC for the same student in the same year. One credit per student.
- Treating §529 K-12 tuition above $10,000/year per beneficiary as qualified. Excess earnings are taxed plus 10% penalty.
- Using stepped-up basis for a lifetime gift. Gifts get carryover basis; only inheritances step up.
Bottom line
- AOTC $2,500 max (40% refundable), first 4 years only; LLC $2,000 max per return, nonrefundable, unlimited years; both phase out $80,000-$90,000 single / $160,000-$180,000 MFJ in 2025
- §529 distributions tax-free for qualified higher-education expenses; K-12 tuition capped $10,000/year, student-loan payoff capped $10,000 lifetime per beneficiary
- §529 superfunding front-loads 5 × $19,000 = $95,000 in one year via Form 709
- 2025 estate/gift exemption $13.99M; annual gift exclusion $19,000 per donee; direct-pay tuition and medical unlimited under §2503(e)
Exam shortcut
Same student, same year, one credit. Default to AOTC if eligible (refundable); fall back to LLC. Gift = carryover basis. Inheritance = stepped-up basis. Donor's holding period tacks on gifts; the heir gets automatic long-term. QCD beats an itemized charitable deduction because it cuts AGI, which cascades into IRMAA, SS taxability, and the 7.5% medical floor.
The full lesson (about 1,841 words, 12 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 1
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