American Opportunity Tax Credit

[Superglue27]

I received a 1098-T from my previous 4-year university. I'm assuming I received this form because I paid off my tuition balance this year, though I haven't been enrolled in classes since 2021. This same year I've been taking classes at my local community college. I've received pell grants to cover tuition, thus no 1098-T from this school. I want to know if in regards to the AOTC, do I only need to include information pertaining to my 4 year university or do I need to include my pell grants and expense for my community college as well? 

[AmyC · Accepted solution]

The AOTC is only good for 4 years and then you switch to Lifetime Learning Credit. The AOTC requires you to be enrolled at least half time while the LLC does not. In addition, you must be pursuing an undergraduate degree for AOTC. You can Compare Education Credits to see what you can claim.

If your expenses for community college exceed your pell grants, those can be entered each year.

[Hal_Al · Accepted solution]

Q. Do I only need to include information pertaining to my 4 year university or do I need to include my pell grants and expense for my community college as well? 

A. You do not enter any educational info on your 2024 tax return.

Paying off the debt for previous years education (" I paid off my tuition balance this year, though I haven't been enrolled in classes since 2021") does not count for a tuition credit. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. 

If your community college classes were fully covered by the tax free Pell Grant, you cannot claim a credit for that either.  There is a loop hole available to claim a credit when you're on scholarship. But, it's not as advantageous if you are only eligible for the Lifetime Learning Credit (LLC). The LLC is 20% of tuition paid and is non refundable (it can only be used to offset an actual tax liability.  See explanation below.

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 a tuition 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 conditions of the grant are that it be used to pay for qualified expenses (Pell grants are not restricted like that.

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 tuition credit. But if she reports $10,000 as income on her return, the parents can claim  $8000 of qualified expenses on their return.

Books and computers are also qualifying expenses for tax free scholarships. 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 $9000 of taxable scholarship income, instead of $10,000.