Can college expense paid with the TEACH grant be used towards qualifying for american opportunity tax credit?

[brown-tisha]

My son receives this TEACH grant which is issued thru Federal Student Loan. The TEACH grant is money available to students majoring in education. There are some requirements attached to this TEACH grant in which one is a requirement to teach in a specific field of education and certain school districts. The student must teach in one of these positions for 4 years within 8 years of earning their degree. If the student fails to meet these requirements the TEACH grant becomes a Federal Student loan and must be paid back. If the student meets all the requirements it does not have to be paid back. I am just not certain if we can use college expenses paid with the TEACH grant as expenses paid by us given that we really have no idea if it will end up being a loan or not. I know college expense paid with student loans can be claimed but need clarification on this TEACH grant. Thank you. 

[ToddL]

The TEACH Grant should have been reported on the Form 1098-T as a non-taxable Scholarship or Grant. Entering this in the Education Expense interview will result in the program reducing your qualified educational expenses by the amount of the grant.

Any educational expenses paid with non-taxable scholarships or grants do not qualify as educational expenses paid by you for purposes of Education Tax Credits. 

From the IRS website at: https://www.irs.gov/Individuals/Qualified-Ed-Expense

Expenses Cannot Be Paid with Tax-Free Funds

You cannot claim a credit for education expenses paid with tax-free funds. You must reduce the amount of expenses paid with tax-free grants, scholarships and fellowships and other tax-free education help.

If, in the future, the TEACH Grant is converted to a Federal Student Loan then you MAY be able to amend your 2015 return to claim the American Opportunity Credit. That depends on when the grant is converted to a loan, since there is a 3-year time limit to file amended returns. If converted, you would be able to take the student loan interest deduction for any interest paid.

[dmilton]

From https://apps.irs.gov/app/vita/content/globalmedia/determining_qualified_education_expenses_4012.pdf it seems that a student may elect to include some of the grant as income. This may increase the amount of qualifying expenses that can be used in calculating an education credit.

[Hal_Al]

dmilton is correct, 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.  So, it somewhat depends on the conditions in the TEACH grant.

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.

Another way: say the scholarship paid for room & board, in the parent’s interview.

This is not some sinister scheme. From the 2019 form 1040 instructions (pg 95): “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040, line 18c, and IRS.gov/EdCredit.  Page 16 of PUB 970 (2019) actually has examples of how to do the “loop hole”.