529 and AOTC

[laurielpoole]

I need help.  This is the first year TT is saying I am eligible for the AOTC because my son was in college.  

He received a 1098-T.  Box 1-$5238.00, Box 5-$3475.00.    That left $1755.00 we paid for tuition and fees.  We still claim him as a dependent on our taxes, so my understanding is I enter the 1098-T on my return.  

We probably spent 200 on books, supplies, etc, making expenses $1955.00

I (the recipient) received a 1099-Q from a 529 distribution for $1944.00 with earnings of 523.91, Leaving the basis at around $1470.00.  

TT seems to indicate that if I claim the 529 distribution as "taxable income" then I (the parent) can claim a credit for tuition and expenses under the AOTC.   Once it is all entered, I do see that TT entered the earnings from the 529 onto my 1040 as taxable income.  

I seemed to have missed this credit in 2023 when I paid tuition out of pocket and didn't use any 529 funds at all, but I am not going to amend that years return regardless. 

Honestly, I didn't know this credit existed until I started putting the info in TT this year.   It does help reduce our tax burden for us to claim the credit, as opposed to allowing the 529 to be completely tax free.   Is this correct?  

Also, for the credit, should I only claim the taxable earnings to get a credit, so the $523.91?  It's so confusing.

[KrisD15]

Who was issued the 1099-Q, you (the owner) or the student (beneficiary)?

It's usually better to have the student make the distribution and have Form 1099-Q issued to the student. That way if any of the distribution is taxable, it will be taxable to the student at the student's tax rate. Making direct transfers to the school will result in the 1099-Q being issued to the student. 

A distribution of 1,944 would be best applied to Room and Board. Room and Board can offset a distribution, but cannot be used for a credit. Even when a student is at home, a living expense not more than the school charges for room and board can be applied. That would leave zero distribution taxed.

That leaves expenses over scholarships of 1,955. 

The credit maxes out with 4,000 expenses. 

Most likely it would be advantageous to have the student claim 2,005 in scholarship income giving you 4,000 towards the credit. This also would depend on whether the student has other taxable income. 

In TurboTax, enter the 1099-Q first, then enter Form 1098-T, additional expenses for books and supplies as well as room and board expense.

Continue through the Education interview until you click "Maximize my tax break"

The Room and Board should cancel-out the distribution and the program should suggest the student claim 2,005 scholarship giving you the full credit.

If the student's income is below the filing threshold for dependents, they needn't even file and the scholarship income will not be taxed. The scholarship income would also qualify as earned income for the student allowing them to contribute to an IRA if they so desire. 

Type    letme    to see the options for the credit and to change the expense allocation if desired.  

Pub 970 explains more 

[Hal_Al]

If your student is half time or more, room & board (R&B) are qualified expenses for a 529 distribution (but not the tuition credit or tax free scholarship). So, forget the 1099-Q.   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 can. 

"I seemed to have missed this credit in 2023 when I paid tuition out of pocket and didn't use any 529 funds at all, but I am not going to amend that years return regardless."

The credit is worth $2500 to most people.  A minimum of $1955 based on your 2024 numbers. You should probably amend.

 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 your numbers: Student has $3475 in box 5 of the 1098-T and $5238 in box 1. At first glance he has only $1763 for the  American opportunity credit. But if he reports $2237 (4000 -1763) as income on his 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 $200 in expenses for those course materials, paid out of pocket. He would only need to report $2037 of taxable scholarship income, instead of $2237.

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”.

If that is his only income, he will pay no tax. Technically, he doesn't even need to file.

[laurielpoole]

I was issued the 1099 because I paid his tuition and fees, then reimbursed myself for the costs after the fact.  So I was the recipient listed on the form. 

He goes to community college and lives with us, so there is no housing option. We pay all his expenses while he lives at home.  He only worked a part time job and had W-2 income of a little over 4k, and he already filed his return because kids are impatient.  

So, now I just want to get my taxes filed and done with, but its so confusing and I am terrified of the IRS. 

[Hal_Al]

He can file an amended return and still owe no tax. He does not have to do that until well after you have filed, claiming everything you're entitled to.  The simple way to claim the full AOTC, on your return, is to enter the 1098-T with $4000 in box 1 and box 5 blank.  Don't bother with any other numbers. *

This education stuff is very common and not an IRS target.

Students living at home are still allowed an R&B allowance. You can be sure it's more than $1944. So, again,  forget the 1099-Q. 

*The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. 

If you claim the tuition credit, you do need to report that you got one(the TurboTax interview will handle this)

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. 

If you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.