1098-T form as a dependent student

[brookannwhitmarsh12]

Hello, this is my first time filing taxes ever. I am a dependent student -- according to what i've submitted to FAFSA, and also live at home etc. However, my parent does not file taxes. Would I be able to receive any of the education tax credit when I file? I also have approx. $2000 in federal pell grants that exceeds my tuition (aka is taxable). Thank you.

[Hal_Al · Accepted solution]

 Q. Would I be able to receive any of the education tax credit when I file? 

A. No. The law was written this way to specifically prevent what you want to do (shift the AOTC to the student when the parents are not eligible).

A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit (AOC or AOTC) if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit.                                                      

Reference: Line 7 instructions for form 8863.

https://www.irs.gov/instructions/i8863#en_US_2024_publink53002gd0e674

https://www.irs.gov/instructions/i8863

If the $2000 taxable grant is your only income, it is not enough to require you to file a tax return.  If you have enough other income, that you actually have a tax liability, then you may be eligible to claim an education credit to cover that liability, but it requires declaring more scholarship as taxable to free up tuition to claim the credit with. See separate reply. 

[Hal_Al]

 There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this  if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket. She would only need to report $5000 of taxable scholarship income, instead of $6000.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.