Hello,
I'm parent of "half-time" student who's living at home; she's no longer a dependent. I'm assisting with her tax return.
She has taxable income from part-time job (+/- $17K).
In Fall of 2023 she won an award from the college for a fundraising drive ($1500); she also had a paid internship during the Fall semester (remainder of Box 5).
Box 1: $420.25
Box 5: $4987.50
No restrictions on 1098-T.
Other qualified expenses = $1190.
Question 1: How can I learn if she (or I) am eligible for AOC?
Question 2: Since scholarship exceeds tuition + QE, can some $ from Box 5 be deferred for tuition in 2024?
Thanks!
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Q 1: Is she (or I) am eligible for AOC?
A1. You are not eligible because she is not your dependent. She is eligible, but it takes a little maneuvering (see below).
Q 2: Since scholarship exceeds tuition + QE, can some $ from Box 5 be deferred for tuition in 2024?
A2. No. More accurately, probably not. Only if some of that $4988 (in box 5) was specifically awarded for 2024 expenses, and it sounds like it wasn't. For example if the $1500 had been awarded in December, rather than "fall".
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 school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.
Using your numbers: Student has $4988 in box 5 of the 1098-T and $420 in box 1. At first glance she has $4568 of taxable income and nobody can claim the American opportunity credit. But if she reports $4988 as income on her return, she can claim $420 of tuition on her return.
Books and computers are also qualifying expenses for the AOC. So, she has $420 +1190 = $1610 of qualifying expenses. The AOC is 100% of the first $2000 of qualified expenses, 40% refundable. Her tax liability should be fully covered and she should get about a $644 refund.*
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”.
*That $420 doesn't seem like a lot, but my quick (not double checked) calculation says it gets her an extra $168 refund (because the credit is 100%).
To make some of the scholarship taxable, you tell TurboTax how much you want taxable by saying it was used for room &board. At the scholarship screen, you will be asked if any was used for room and board, answer yes. Then enter the amount you want to be taxable (usually all of it), in the pop up box. R&B are not "qualified educational expenses". So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B. This will put it on line 8r of Schedule 1 (this line is new for 2022-3).
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