Choosing a larger education credit

[oskeewow]

Hello.  I'm using a 2023 Turbotax Premier desktop. I got my first son into a university and now I'm confused as to what to put in this page called 'Choosing a larger education credit.'  I paid $4000 out-of-pocket for college tuition and the remaining with distributions from the 529 plan.  Does this mean I can put $4000 on the 'Choosing a larger education credit' page?  Thank you for your insights!

	fall 2023	spring 2024	row sum
Room & boards	$7 058.88	$7 358.88	$14 417.76
tuition	$5 693.00	$5 883.00	$11 576.00
Total	$12 751.88	$13 241.88	$25 993.76
paid out-of-pocket	$4 000.00	$4 000.00	$8 000.00
paid w/ 529plan	$8 751.88	$9 241.88	$17 993.76
1098-T Box 1	11,531.62
1098-T Box 5	$500.00
1099-Q Box 1	22,539
1099-Q Box 2	$1 617.00

* 1098-T Box 1 includes Fall 2023 and Spring 2024

[Hal_Al]

Simple answer: yes, enter $4000.  In most cases TurboTax (TT)   prepopulates that box with $4000.

The American Opportunity Credit (AOTC) is worth up to $2500 and it only takes $4000 of qualified expenses (tuition, fees, books and other course materials, including a required computer) to get the full credit. The Lifetime Learning Credit (LLC) is worth up to $2000, but takes $10,000 of Tuition and fees to get that. It would be rare for an undergrad not to choose the AOTC. 

That screen suggests trying other numbers, but again it's rare for claiming the full $4000, for the credit,  to not be the right decision. 

Room & board (R&B) are qualified expenses for a 529 distribution, but not for a credit or for scholarships to be tax free. 

[Hal_Al]

You may already know this, but some of your 529 distribution will be taxable.  You don't have enough Qualified educational expenses (QEE) for the 529 distribution to be tax free.

$25,994 Total QEE

   -    500 Paid by scholarship

   -4,000  Used to claim the AOTC 

=21,494  Available for the 1099-Q 

22,539 - 21,494 = $1045 of the distribution is non qualified

1045 / 22,539 = 4.63% of the distribution is non qualified

$1617 (box 2 earnings) x 4.63% = $75 taxable income.  The 10% penalty will not apply because you used some of the QEE to claim the AOTC ("The tuition credit exception"; there is also a scholarship exception).

If you have some book and computer expenses, that amount can probably be reduced. 

There are three things you can do with your Qualified educational expenses (QEE):

1. Allocate then to scholarships (so that the scholarship remains tax free)
2. Use them to claim an education credit
3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, but it doesn't always do a very good job if you want something different. TurboTax allocates QEE, in that order, until you tell it otherwise.  It's best if you have some idea of the outcome expected, when you make your entries. You are allowed to re- allocate the QEE for the best tax outcome.  Note that it does not matter what you actually paid "out-of-pocket". 

[oskeewow]

I like your first reply.  It is simple to understand.  Second reply... 🙂  I will need to study some more.  Thank you for your time and insights!