AOTC and timing of tuition payment vs scholarship funding

[NameForYou]

I have a child who started college for the first time in the 2023 fall semester. Tuition and fees are paid by a combination of cash out of pocket and tax free scholarship.

I am concerned my 2023 return's AOTC numbers were incorrect thanks to the spring semester scholarship funds posting in January 2024 while our cash out of pocket portion was paid in December 2023.

Due to this timing difference, Box 1 of the 1098-T for tax year 2023 equals the cash we paid for both Fall 2023 and Spring 2024 plus only the fall semester's scholarship funds (grand total $8,235.01). Box 5 shows scholarship funds for only the fall semester, $3,931.49.

Since this is all new to me, I just entered the 1098-T without adjustments in TT. This resulted in getting the maximum AOTC credit because the adjusted qualified education expenses on line 27 of Form 8863 were $4,000.00.

Actual expenses paid/scholarships received in 2023:
Cash paid in July 2023 for fall 2023 semester: $2,263.51
Cash paid in Dec. 2023 for spring 2024 semester: $2,040.01
Scholarship funds for fall 2023 semester, received Aug. 2023: $3,931.49

2023 Form 1098-T:
Box 1: $8,235.01
Box 5: $3,931.49
Box 7 is checked to indicate that box 1 includes amounts for an academic period beginning January - March 2024.
Box 8 is checked to indicate the student is at least half-time
No other boxes or checkboxes are filled in.

2023 Form 8863:
Part I, line 8: $1,000.00
Part II, line 19: $1,500.00

The Spring 2024 scholarship funding equaled $3,931.49 and was posted in January 2024.

Questions:
1. Is my 2023 Form 8863 return wrong? If yes, exactly what adjustments were needed? (e.g., reduce box 1; change box 5; check some other box?)
2. Should I file an amended 2023 return to correct it?
3. How do I handle 2024's Form 8863? Will adjustments to Box 1 and/or Box 5 be needed due to whatever the answer is for tax year 2023?
* In tax year 2024, I expect the same timing of fees paid and scholarship funding. This means fall 2024 fees for the same child will be paid in August with scholarship funds posting at the same time. However, spring 2025's cash out of pocket fees will be paid in December 2024 while the scholarship funds will post in January 2025.

Please note I've searched the community before posting. The closest discussion I found was this one. However, the answers and recommendations in that thread are not clear enough to me so I don't know what I need to do for my situation. Thanks so much for any help or guidance. I wish this were easier! 

[Hal_Al · Accepted solution]

Q. Is my 2023 Form 8863 return wrong?

A. No.  You are allowed to count (for the AOTC) payments made in 2023 for qualified  expenses incurred in the first term of 2024. 

Q.  Should I file an amended 2023 return to correct it?

A.  No. You qualify for the full ($1000 + $1500 = $2500) AOTC for 2023. 

Q. How do I handle 2024's Form 8863? Will adjustments to Box 1 and/or Box 5 be needed due to whatever the answer is for tax year 2023?

A. Yes. Do not count 2024 expenses  that were paid in 2023  (and claimed on your 2023 form 8863).  Based on how the school did it, on the 2023 1098-T, they will probably not include the $2040.01 in box 1 of the 2024 1098-T.  

Your situation is a little simpler than those described at the other post ( this one ).  But, as you noted it can get complicated.  The key is: use you own records.

Some of the scholarship may end up being taxable to the student. Here's my standard reply on that subject:

 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 usually do this if the 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.

[NameForYou]

Thank you so much, Hal_Al. I am so relieved to hear what I filed for 2023 is correct. I now understand how this will work going forward, too. I appreciate the info on the scenario where the scholarship funds appear to be greater than expenses. I will look at this further in case my student's last year in college goes this way. 

I do have one follow-up question regarding the books and computer expenses you described at the end of your answer. I know book expenses can be claimed but how does one claim expenses for the purchase of a laptop for school? Are there any supporting documents or proof required? Generally speaking, we all know students need a computer for college work these days but as it pertains to claiming it for AOTC, do I need to know of any particular requirements? My second child is starting college in August this year and we just bought a laptop for that purpose. 

On a related note, are required course (non-book) materials also a qualified education expense? For example, if a course requires purchase of certain tools or consumable materials (e.g., paints, canvases, pliers, etc.), can these costs be included in qualified expenses? 

Thanks again, Hal_Al! I greatly appreciate your help. 

[Hal_Al]

Q. How does one claim expenses for the purchase of a laptop for school? Are there any supporting documents or proof required?

A. No special documentation is required. Simple answer: Yes. A computer is a qualified expense for calculating your tuition credit. Include the cost under the entry for "books and materials". For a full discussion see:

https://ttlc.intuit.com/community/college-education/discussion/is-a-computer-a-qualified-expense-for...

Q. On a related note, are required course (non-book) materials also a qualified education expense? For example, if a course requires purchase of certain tools or consumable materials (e.g., paints, canvases, pliers, etc.), can these costs be included in qualified expenses? 

A. That's a little more iffy. The relevant terminology is "required for attendance".  

Qualified expenses, for the American Opportunity Credit:  "Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance" (Pub 970)