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ns4
Level 2

American opportunity tax credit

Hello,

 

My daughter is currently a freshman at the college and I won't to take advantage to American Opportunity tax credit. I haven't filed 2019 tax yet but when we do I will file married joint return and our income will be less than $160000 this year, we also claim our daughter as a dependent. Also, my daughter worked part time in 2019. Should I apply for AOTC or should I have my daughter file her own tax and file for AOTC?

Thank you,

Nick

1 Best answer

Accepted Solutions
MayaD
Expert Alumni

American opportunity tax credit

Yes, your daughter qualify as your dependent so you will claim her on your Tax return and you will claim the AOC.

For the second part of the question, your daughter does not need to file a return but she can file to receive a refund if she had any income tax withheld . She will check the box that someone can claim her as a dependent.

 

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17 Replies
MayaD
Expert Alumni

American opportunity tax credit

If you are claiming your daughter as a dependent and she is only filing a return to receive a refund, she can't claim the education credit. You will report form 1098-T on your return and claim the education credit. 

If you are not claiming your daughter as a dependent, she can report Form 1098-T on her return and claim the education credit.

Most probably you are in a higher tax bracket and you would benefit more from the AOTC.

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ns4
Level 2

American opportunity tax credit

To make sure I understand this correctly you are saying that I can claim her as dependent (she is 18 years old) and file for AOTC and she also needs to file her own tax since she worked part time even though she probably made less than $5000 in 2019. Please confirm.

 

Thank you

MayaD
Expert Alumni

American opportunity tax credit

Yes, your daughter qualify as your dependent so you will claim her on your Tax return and you will claim the AOC.

For the second part of the question, your daughter does not need to file a return but she can file to receive a refund if she had any income tax withheld . She will check the box that someone can claim her as a dependent.

 

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ns4
Level 2

American opportunity tax credit

Thank you Maya. Last question I can do all of this using Turbo Tax deluxe version (already purchased) right? and I also need to purchase Turbo Tax for my daughter also?

 

Thank you

MayaD
Expert Alumni

American opportunity tax credit

Yes, you can can use the Deluxe Version to finish your return and your daughter can use the Free Edition.

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Paul90
Returning Member

American opportunity tax credit

Hello,

 

My filing status is MFJ and my wife and I paid for my dependent daughter's prepaid college plan through the State of Florida. 

 

I am not able to enter 1099-Q info into Turbotax - I get the following message: "Because you're not the Recipient of this 1099-Q, you don't need to enter this 1099-Q here."  

 

There's an option to "Add education expenses", which I've done...yet I still continue to get this message.  

 

All of the American Opportunity Credit criteria are met.  I am entitled to claim this credit.  Why does Turbotax not allow me to enter it?

Hal_Al
Level 15

American opportunity tax credit

@Paul90 

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

 

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

 

**Alternatively; 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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, in case of an IRS inquiry.

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." 

 

 ***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.

Paul90
Returning Member

American opportunity tax credit

Thank you for your reply.  I appreciate it.  I wish I could say that it's become clear to me, but it has not.  I put in the 1099-Q info on my daughter's return, but when I go to my return to enter in the 1098-T info the Tuition and enrollment fees portion is already hard coded as $0.  

 

I opened the form to input to the 1098-T, but since that form only has what the school received and scholarship amount, I don't see where I'm able to claim what was paid out of pocket (from previously funded prepaid plan).  

 

For example, if there was $2000 paid from the prepaid fund, how do I get to take the American Opportunity Tax Credit for it?  As you said, it's complicated and I don't know if I'm more frustrated with the turbotax, the tax code or if it's a tie.

Hal_Al
Level 15

American opportunity tax credit

@Paul90 

Q. 1. I opened the form to input to the 1098-T, but since that form only has what the school received and scholarship amount, I don't see where I'm able to claim what was paid out of pocket (from previously funded prepaid plan).  

A.1. You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. 

 

Q.2. For example, if there was $2000 paid from the prepaid fund, how do I get to take the American Opportunity Tax Credit (AOTC) for it? 

A.2.  Enter as described in Q/A 1.  But, that means you daughter will have to declare some of the Pre Paid tuition distribution as taxable.   You can and should claim the full $4000 needed to get the maximum AOTC  That may mean she also needs to declare some of her scholarship as taxable too (see example below).Yeah, I know , it just got more complicated!

 

Q.3.  I go to my return to enter in the 1098-T info the Tuition and enrollment fees portion is already hard coded as $0. 

A.3.  

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to the section you want to change; tuition, in your case.

________________________________________________________________________

There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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 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.

Hal_Al
Level 15

American opportunity tax credit

@Paul90 

If you can provide all your numbers, we can tell you exactly how to do it in TurboTax.  Workarounds are usually best.

Box 1 of the 1098-T

Box 5 of the 1098-T

Box 1 of the 1099-Q

Box 2 of the 1099-Q

Room and board costs

All other qualified expenses paid, namely books, computers, software other course materials or fees not included in box 1 of the 1098-T

Paul90
Returning Member

American opportunity tax credit

Thank you very much for your reply and I apologize for the late response.  I put this aside since we've have extra time this year to file but, had I read your complete reply, I would have responded immediately.  Here's the info:

 

Box 1 of the 1098-T = $2,032

Box 5 of the 1098-T = $2,829

Box 1 of the 1099-Q = $1,659

Box 2 of the 1099-Q = $376

Room and board costs = $0

All other qualified expenses paid, namely books, computers, software other course materials or fees not included in box 1 of the 1098-T = $0 (minimal)

 

Thank you!

 

Paul

Hal_Al
Level 15

American opportunity tax credit

@Paul90 

I assume your daughter a  half time or more student, since you say you qualify for the American Opportunity Credit (AOC).   You are allowed to claim room and board for the pre paid plan distribution, even if she lives at home.  You may claim your actual expenses or the school's R&B allowance/charges to on campus students, whichever is less.  Either way, I'll assume that's more than $1659  (box 1 of the 1099-Q).   Do not report the 1099-Q, at all, it's covered by room & board, on either your return or hers, even though she is the recipient. 

 

Your daughter reports $2829 pf taxable scholarship on her return and you claim $2032 of qualified expenses for the AOC on your return. 

On your return, show $0 in box 5, at the 1098-T screen and $2032 in box 1.  On her return, show $0 in box 1 and $2829 in box 5; to simplify entry.

 

 The 1098-T is only any informational document. The numbers on it are not required to be entered onto your tax return. If you claim the tuition credit, you do need to report that you got one.  You claim the tuition credit, or report scholarship income, based on your own financial records. That sometimes means working around the 1098-T and the TurboTax interview.

 

To get back to the 1098-T screen, go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to the section you want to change; tuition, in your case.

 

Paul90
Returning Member

American opportunity tax credit

Thank you again, but TurboTax isn't letting me enter an amount for Tuition and Enrollment expenses.  It currently shows $0 in an area that cannot be edited.  When I click the Tuition and enrollment fees hyperlink, there's a note that says I entered this number in earlier.  

 

I filled out my daughter's information first, then circled back to my return.  Should I have done my return first?

 

Thank you.

 

Paul

Hal_Al
Level 15

American opportunity tax credit

I edited the above to add:

To get back to the 1098-T screen, go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name (you may actually want to click delete, instead of edit,  and try again).  That should take you to a screen “Here’s your Education Summary”. Click edit next to the section you want to change; tuition, in your case.

 

 

 

It does not matter which return you do first.

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