Can I receive the American Opportunity Tax Credit If I initially paid with my own money and later received scholarships and grants as taxable refunds?

[user10006009]

For the fall semester a combination of grants and scholarships covered my tuition in full, and I received a taxable refund. I know that grants and scholarships that cover for qualified tuition and expenses can't be used to claim the American Opportunity Tax Credit; However, I didn't initially receive the grant and scholarship money until I had already paid for my tuition in full with my own money. 

My question is, If the excess taxable refund I received was entirely the scholarship and grant money, not the money I paid with my account, can I claim for the Opportunity tax credit? In other words, none of the grant and scholarship money was used to pay for tuition. Instead I received the scholarships purely as a refund and paid for tuition with my own money. Does that count for the credit because I used my money initially, or does the fact that the scholarship money could have paid for tuition entirely discredit my chances getting the tax credit?

[Hal_Al · Accepted solution]

As long as you treat the scholarship income as taxable income; you may claim the tuition credit. It's a tax loop hole. It's even spelled out in IRS Publication 970.  The fact that the scholarship money could have paid for tuition does not disqualify you. 

There is one exception; if the conditions of the grant are that it be used to pay for qualified expenses (tuition fees & books), you cannot use the loop hole. 

You should be aware of one other thing. A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. You must have actually paid tuition, not had it paid by scholarships & grants.  It is usually best if the parent claims that credit. 

You cannot claim a credit if you are, or can be, claimed as a dependent by someone else.

[Critter]

If you report the scholarship "refund"   on your return as fully taxable then you can claim the AOC on the payments you made with your own funds. 

[Critter]

Of course if you are under the age of 24 and a full time student that is not paying more than 1/2 your living expenses with money you earned from a job then you are a dependent of your parent and only they can take the AOC.

[linear]

As I understand the circumstances you described, you did not have any actual out-of-pocket education expenses. You cannot claim the AOC.

The taxability of this so-called "refund" may be due to whether or not the scholarship was used for qualified education expenses. The school may be able to provide more information on this.

[Critter]

You can choose to consider the scholarship as taxable thus allowing the other payment for tuition & fees to be from taxed income ... that is a valid tax planning tool and is very effective.

[cjakamika]

I know this has been posted some time ago but I hope I can get further clarifications. If add my Pell grant and student loans into my AIG would the full amount  then go to the American Opportunity Credit? ( I just started school part time  this past semester, my total for courses and books roughly 1,400.00. My total amount awarded between Pell Grant and student loan roughly 4,100.00. What would be the total amount I put for the American Opportunity Credit? ( the 1,400 for for courses & books or the full 4,100 received? ) Thank you for help!!

[Hal_Al]

@cjakamika  - Student loans are not treated the same as scholarships.  You have to pay a loan back, so loan money is treated as your out of pocket money.  You treat only the Pell grant amount as taxable income.  Ignore the loan amount

$1400 is the amount you use to claim the American Opportunity Credit, since that is what was actually paid.