AOTC and whether ESA will be taxable

[gems7798]

@Hal_Al

My daughter asked about the specifics on this last year, but I cannot find the thread and I've been searching off and on for days. 😓 Now I'm trying to make sure I'm doing this right for the next child.

I know how to do the parent portion to receive the AOTC. In my notes I have a formula for figuring out what portion of scholarships or ESA will be taxable, but I'm not sure I have it right.  (You already cleared up my confusion about expenses PAID.) The ESA gets taxed less $ for $ used than scholarships/grant money because of all the basis calculation work, so I should use the scholarship/grant $ first in my calculations?

Qualified expenses PAID - $4000 for AOTC - Scholarships&Grants paid out =Difference 1

Difference 1 (if positive) + room& board -ESA= Difference 2

If Difference 1 is negative, that much of schols/grants already taxable.

If Difference 2 is positive, none of ESA $ is taxable. If it is negative, that much of the ESA $ is taxable and we do the basis calculations to find out how much.

Ex.

$29,000 paid - $4000 AOTC - $24,500 schols/grants = $500

$500+ $12,000 room&board - $13,000 ESA = $-500.

So, none of schols/grants taxable, but $500 of the ESA $ used is taxable, and we need to do the basis calculations to figure out how much of it to enter. And whatever that number is, when doing the shortcut, put it in as 1098T box 5 scholarships with $0 as the box 1 costs.

Do I have that right?

Thank you!

Added: This child had ~$15,000 income from part-time jobs in the same calendar year

[Hal_Al]

You said "If Difference 2 is positive, none of ESA $ is taxable. If it is negative, that much of the ESA $ is taxable and we do the basis calculations to find out how much"

Not exactly. If it is negative, that much of the ESA is non qualified and we do the earnings calculations to find out how much is taxable. 

In your example, you said: "So, none of schols/grants taxable, but $500 of the ESA $ used is taxable (no, it's non qualified), and we need to do the basis (actually earnings) calculations to figure out how much of it to enter (figure how much is taxable). And whatever that number is, when doing the shortcut, put it in as 1098T box 5 scholarships with $0 as the box 1 costs.

No. That's how you would enter any taxable scholarship amount.  Entering the taxable earnings of the ESA/529 distribution is not that simple*.

*But there is a another workaround. Enter the 1099-Q, on the recipient's return.  When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Enter  the net qualifying expenses. In your example, $500 tuition and $12,000 R&B.

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student?
• Is the student a degree candidate attending school half time or more?

[gems7798]

I thought there might be some holes/misunderstandings in my notes. Thank you!

--I and my spouse are the parents; student is our dependent. We did claim the AOTC.

--Student is attending college full-time, working toward a 4-yr undergrad degree, and has on-campus room&board costing $12,000.

--On the 1098T, box 1 incorrectly listed all tuition and qualified fees CHARGED in 2023 ($34,000), instead of PAID ($28,350 tuition and qualified fees).

There were several hundred dollars of books and online programs that had to be purchased not included in box 1 that we kept track of as qualified expenses ($650 + the $28,350=$29,000. total qualified exp. paid)

--Box 5, correctly showed all scholarships and grants paid to the college in 2023 only, none of the payments we made.  I assumed they all had to be used for qualified expenses to possibly be untaxed. So that is a faulty assumption?-we will have to hunt down scholarship details. There were no outside scholarships paid to the student; all were paid directly to the college and reflected in box 5.

--Student worked a part-time job before beginning college and on Christmas break (~$15,000). Student also had a part-time on-campus job while school was in session (~$1,000). I do not know if this was a federal work-study position or not; I did notice that the W2 for it did not list the state (out-of-state college).

--We haven't received the 1099Q yet, but we set up all the kids' ESAs with each of them as the owner. Looking at the oldest's previous 1099Q, the child's social is indeed the recipient TIN. Box 1 across multiple funds should match the distributions received, $13,000. Box 2 will be blank. From looking at end of year statement, fair market value of the remaining amount should be $200, total of lifetime contributions $4,600.

[Hal_Al]

Qualified expenses PAID - $4000 for AOTC - Scholarships&Grants paid out =Difference 1

29,000 -4000 -24,500 = 500

Difference 1 (if positive) + room& board -ESA= Difference 2

500 + 12,000 = 12,500 -13,000 = -500 (negative)

If Difference 2 is negative some of  ESA $ is taxable and we do the basis calculations to find out how much.

500 /13,000 = 3.8% of the earnings are taxable (about $300 of taxable income)

Because she already has over $13,850 of job income, declaring some of the scholarship taxable is not the best option (although the tax difference is only about $20). The amount of taxable earnings (less than $1250) is not enough to trigger the kiddie tax. 

[gems7798]

Took a couple times reading for it all to click into place. I follow now. I'm thinking I read a post of yours before explaining how to shortcut the process when entering the 1099Q, but, of course, I cannot find it. COuld you copy it here?

Thank you!