AOTC, Claiming when Grants/Scholarships Exceed Tuition

[laz_flow]

I, an independent full-time student over the age of 24 who can not be claimed as a dependent by anybody, had scholarships/grants exceed the cost of my tuition by about $7,500 in 2025. My grant/scholarship money does not specify that it is required to go toward tuition. Therefore, is it still possible for me to claim the AOTC by taxing the full amount of my scholarship/grant money?  If so, is this done by allotting the full amount of my grants/scholarships as "amount paid toward room and board" on the TurboTax platform? Does it matter if I did not actually make a payment of tuition, since my university deducted the cost of tuition from my scholarship/grants and disbursed the excess grant money to me? Is taxing my full scholarship/grant amount meant to compensate for this?

Additionally, I have been paying back a debt I owe to a different university for tuition for a course. I paid $120 toward this debt last year. Would this be included in my educational expenses? I did not get a 1098-T from this school. Should I therefore add this amount to my educational expenses on top of my tuition from the university I attended last year?

[Hal_Al]

Q.  I have been paying back a debt I owe to a different university for tuition for a course. I paid $120 toward this debt last year. Would this be included in my educational expenses? 

A. No. The reason is that the payment are not for current year education. 

Q. Is it still possible for me to claim the AOTC, on 2025 return,  by taxing the full amount of my scholarship/grant money?

A. Yes, but probably not the full amount.

 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 an example: Student has $17,500 in box 5 of the 1098-T and $10,000 in box 1. At first glance he/she has $7500 of taxable income and nobody can claim the American opportunity credit. But if she reports $11,500 as income on her return, she can claim $4000 of qualified expenses on her return, for the AOC.

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 $10,500 of taxable scholarship income, instead of $11,500.

[Hal_Al]

Q, Is this done by allotting the full amount of my grants/scholarships as "amount paid toward room and board" on the TurboTax platform?

A. Yes. Not the full amount, but $11,500 in the first example and $10, 500 in the 2nd.

Q. Does it matter if I did not actually make a payment of tuition, since my university deducted the cost of tuition from my scholarship/grants and disbursed the excess grant money to me?

A.  No. For tax purposes, you DID make a payment with your  $4000 of tax reportable money.

[laz_flow]

Thank you @Hal_Al  for getting back to me and clarifying this. Your examples were very helpful. I have one more question regarding the amount to allot: My educational expenses, including tuition and required textbooks from school was around $1,700. My scholarships/grants were in the amount of around $9,100, leaving me at a surplus of $7,400. Therefore, if I add $4,000 to this amount remaining (the $7,400), it comes out to be more than the amount of my scholarship/grants I received ($11,400 vs $9,100). Is this still the correct way to input this information? What would I do in this case?

[Hal_Al]

$4000 is the common example because it is the amount needed to get the maximum AOTC.  In your case you only have $1700 of expenses. So, yes, you declare the whole $9100 of scholarship as taxable, allowing you to use the whole $1700 for the AOTC.