2025 AOTC, Scholarship, and 529 Plan

[Julie4726]

Hi! I spent many hours researching and reading discussions about AOTC. I found most of my answers in TurboTax community. I just want to know if I did my taxes correctly. I'm using the desktop version of TT.

Sorry! A little long but I wanted to provide all relevant info.

Parents/Dependent 21 year old student met all requirements to claim AOTC
529 Plan - Parent is owner/recipient of distribution and student is the beneficiary.

$30,000 - 2025 Cost of attendance 
$20,000 (1098-T Box 5)  - 2025 Scholarship received- nonrestricted 
$11,000 (1098-T Box 1) - Tuition paid by scholarship - Qualified Educ Exp (QEE)/Non-Taxable 
$9,000 - Room & Board paid by scholarship - Taxable to student
$10,000 received 529 distribution for the remainder of qualified expenses - per 10-Q, 7,000 earnings and $3,000 basis

1. Parent Tax Form - Claim AOTC
To simplify things, under Deductions & Credits, 1098-T section, I entered $11,000 in Box 1 and $7,000 in Box 5 to trigger $4k of AOTC resulting in a refundable credit of $1,000. I entered nothing else.
Q - Is this method valid?

2. Student Tax Form-claimed as a dependent
In 1098-T section, I reduced amount in Box 1 by $4,000 (now AQEE=7,000), increasing the taxable scholarship to $13,000 ($9,000+4,000). It shows up in Other Income Line 8r (Taxable Scholarship). I did not really see a place to allot in Room & Board on Step by Step page. I probably could have entered it in the Forms section but it's pretty confusing.

Q - I reported the $4k taxable in the student tax form because the same amount was claimed by parents. Is this correct?

3. Parent Tax Form - Report Non-Qualified 529 distribution by parent(10-Q recipient)

Since I got reimbursed by the 529 plan for all the 2025 educ exp not covered by scholarship, I would be double dipping if I used $4k for AOTC if expenses were already paid by 529. I read that I could make the $4k of my 529 distribution non-qualified so I calculated the taxable portion of the 529 earnings. This is the first year we can claim AOTC and I wasn't thinking when I withdrew funds from 529 last year. Also, I had to go to Forms section again to manually enter the non-qualified portion of the 529 distribution. There were no questions in the Step by Step section to see if 529 distributions were all used for QEE.

My calculation was 4,000/10,000 x 7,000 = $2,800 taxable portion of the 529 earnings and entered in Other Income on Sch1 Line 8z (Labeled Non-Qualified 529 Distr). No 10% penalty because I claimed AOTC.

Q - Did I calculate it correctly?

If everything is correct, my refund will increase by $650, and I gained a wealth of knowledge!

Thanks so much in advance!

[Hal_Al · Accepted solution]

You have $10K distribution from your 529 plan (1099-Q).  The $9000 R&B goes to that.  It doesn't matter that the scholarship paid R&B.  At tax time, you're free to allocate expenses for the best benefit*. Allocate $1k of the tuition to the 1099-Q.  The 1099-Q is then fully covered. None of it is taxable and it does not even need to be entered. 

Allocate $4K of the tuition for the AOTC.

That leaves 11K - 1K - 4K = $6K tuition to allocate to the scholarship.  $20K - 6K = $14K taxable scholarship to the student.  If that is his only income, he will pay no federal income tax (it's less than his $15,750 maximum standard deduction and filing requirement).**

You don't need it, but if you have books and computer costs, you can also allocate those to the scholarship.  

 "Cost of attendance" (COA)  is not meaningful unless you spent more on R&B than the COA allowance for R&B.

The simpler entry methods: on your return enter $4000 in box 1 of the 1098-T and  leave box 5 blank (your way was just as good).  Don't enter the 1099-Q,*** at all. On the student's return, enter 0 in box 1 and $14,000 in box 5 (or $6000 in box 1 and $20K in box 5).

Here's a 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...

*Scholarship not used for tuition, fees, books and computer (QEE) is taxable, regardless of whether allocated to R&B or a trip to Disneyland. 

**Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $15,750 filing requirement (2025) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

Taxable scholarship goes on line 8r of Schedule 1, from which TT treats it as hybrid income.

***The 1099-Q is  only an informational document. The numbers on it are not required to be entered onto your (or your student's) tax return. The interview is complicated and it's easy to make mistakes. Avoid it if you can and you probably can. 

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records (you don’t need it). You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships.

References:

1. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
3. "IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc; then, you do not need to enter the form." 

[Julie4726]

Thanks for clarifying things and for showing a simpler method. I over-complicated things and did unnecessary calculations. I was so hung up on the idea that since all the education expenses were covered by scholarship and 529, I would be double-dipping if AOTC was claimed. Here's what I did.

Parent return
I did what you suggested and entered $4k on Box 1 and $0 on Box 5 of 1098-T. I entered nothing else in this section.

I deleted 10-Q, and that removed non-qualified portion of 529 distribution I included in misc. income. I didn't quite understand at first but it makes sense now because my student was reporting the amount I'm claiming for AOTC as taxable scholarship so there's no double-dipping.

Dependent student return
In my original post, I labeled $30k as COA but it's actually the total educ exp paid by scholarship and 529
Scholarship = $20k (non-restricted)
529 distribution - $10k
Tuition = $11k
R&B = $18k (not exceeding school's COA) - allocated $10k to 10-Q distribution so 10-Q is fully covered.
Required books/supplies = $1k

So my new calculation is
QEE $11k (tuition) + $1k (books) - $4k (AOTC) = $8k (tax-free) 

1098-T Box 1=$8k   Box 5=$20k    or   Box 1=$7k    Box 5=$20k   $1k entered in educ exp section for books
Total Scholarship of $20k - $8k(QEE) = $12k taxable scholarship (reported in Sch 1 Line 8r)

I didn't even enter R&B anywhere in my student's tax return. As you indicated, scholarship in excess of QEE is taxable regardless of how it's spent (R&B, travel, shopping, etc.). Do I need to enter R&B?

Lastly, my student has $15k of total income from wages ($11k), dividends and capital gains before taxable scholarship so she needs to file a tax return and file Form 8615 (for kiddie tax). Fortunately, this year, we're in a lower tax bracket, and she is taxed under parent's tax rate.

I hope I accounted for everything correctly. Thanks so much for your help!

[AmyC]

No, don't enter the room and board since the Q covered it and wasn't required to be entered on your return. The Q covered room and board and $1k of expenses - let's use the books to keep it easy.

Student enters Box 1amount minus the $4k you used  box 5 matches form.  Since the Q covered the extra books, no need to add them.

Well done!

[Julie4726]

I'm a little confused, though. The reason I do not need to add $1k of books to QEE is because I already got reimbursed by  529 and I am already claiming the max AOTC of $4k? So that would be double-dipping?

[AmyC · Accepted solution]

If the Q covered room and board plus the $1k of extra books, you should not enter the Q or related expenses covered by the Q.  IRS Publication 970, Tax Benefits for Education states that nontaxable distributions should not be entered.

If you are entering the Q, then you would add the room and board and those extra expenses. I thought the Q was not taxable and therefore, not entered. 

@Julie4726