1098t loophole for dependent using room and board

[CC122]

I have a 1098t.  for my dependent daughter, in box 1 is $12,455 and in box5 is $16,314. She had $1,500 in books and supplies fees. What do I put in room and board fees in order to claim the AOTC credit. And just to clarify does she have to file a tax return for the taxable excess if its under the filing threshold?

[Hal_Al]

Q. Does she have to file a tax return for the taxable excess if its under the filing threshold?

A. No.  But you may want to anyway, just to document that she declared it taxable.  So far,  we have seen no evidence that is really necessary, as use of the "loop hole" is so common.

Q. What do I put in the amount of scholarship used for room and board box in order to claim the AOTC credit?

A. $6359.  $16,314 - 12,455 - 1500 = $2359 of her scholarship is currently taxable. Add $4000 for the tuition you will use to claim the AOTC = $6359 that she now needs to declare taxable.  

There is a short cut.  On your return, enter a 1098-T with $4000 in box 1 and $0 (or blank) in box 5.  On her return, if she files one, enter a 1098-T with 0 in box 1 and 6359 in box 5. 

For explanations, see this post on the five main points on the  1098-T:

https://ttlc.intuit.com/community/college-education/discussion/re-what-do-i-do-with-form-1098t/01/37... 

[CC122]

Thank you. Does it make a difference which way it's entered, either the shortcut or room and board way? 

[Hal_Al]

Q.  Does it make a difference which way it's entered, either the shortcut or room and board way? 

A. No, not in the result.  In addition, what you enter is not sent to the IRS.  The IRS only gets the results that TurboTax enters on the IRS forms.

The short cut just makes entry easier and reduces the chance of errors. 

[NCperson]

@Hal_Al curious, on the loophole, my understanding is that only works for unrestricted scholarships as the restricted scholarships must be netted against the QEE before determing whether the loophole is applicable. is that not true as your response doesn't make that distinction.... thank you...

[Hal_Al]

@NCperson  Yes, you are correct, the scholarship must be unrestricted (or at least enough of it to cover the tuition allocated to the AOTC).  My standard post (see below) on that subject covers that detail. That explanation is also included at the "five main points on the 1098-T" link.

In this case, the poster asked only a "how to" question rather that a "may I" question and the wording indicated she was familiar with my postings on the "loop hole" details. That said you're right, reminding them of that detail is  probably appropriate.

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 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”.