College tax credit

[mandosmom]

I have only used the AOTC credit for my son one time.  On the 1098-T he has $5784.00 in box 1 and $17502.00 in box 5.  I am a single parent with 3 dependents. Why am I not getting the AOTC? 

[Bsch4477]

You didn’t get the credit because you had no expenses. Everything was covered by the scholarship. There is a legal way around this. Let the student pay more in tax by not using 4000 of scholarship and pay the extra tax which is more than outweighed by you claiming the 4000 in expenses. Remember that the 1098-T is an informational form so you can report values that differ from those that you see on the form. In the student’s return in the 1098-T form in the program enter 5784 in Box 1 which represents total qualified education expenses. In Box 5 enter 21502 which accounts for the increase in the student’s taxable scholarship amount since you are reporting that 4000 of the scholarship was not used for education and instead you paid that amount yourself. Look on line 8 of his 1040 and you should see the 15718 taxable income.  Be sure that you checked the box on his return saying that someone else will claim him. 

Now on your return in the education credit section just enter 4000 as expenses. You don’t have to do anything else and you should see your 2500 credit.

If you are interested download Pub 970 which has examples of what I described. 

[mandosmom]

Hi.  

Everything was not covered by the scholarship I paid $2200.00 a semester for his tuition.  Do  I remove the 1098T from my tax return and my son puts it on his tax return? Will that make him owe money? 

[Hal_Al · Accepted solution]

Q.  Do  I remove the 1098T from my tax return?

A. No. You modify it when you enter it.  In your case, enter the 1098-T with $4000 in box 1 and box 5 blank. 

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T.  The easiest way to do this is just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

Q. Does my son also put the 1098-T on his tax return? 

A. Yes, but he also modifies the numbers.  Because you used $4000 of the tuition on your return, he enters only $1784 ($5784 - 4000 = 1784) in box 1, on his return (or, as Bsch4477 describes, add $4000 to box 5, instead of subtracting $4000 from box 1). 

Q. Will that make him owe money? 

A.  Yes. Only scholarships that are allocated  to  qualified expenses (tuition, fees, books and other course materials, including a required computer) are tax free.  Room & board are not qualified expenses. 

Restating what @Bsch4477  said earlier:

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 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.

Using your numbers as an example: Student has $17,502 in box 5 of the 1098-T and $5784 in box 1. At first glance he has $11,718 of taxable income and nobody can claim the American opportunity credit. But if he reports $15,718 as income on his return, the parents can claim $4000 of qualified expenses on their return. The student will get a $13,850 standard deduction, so only  $1868  (15718 - 13850 = 1868) will actually get taxed. 

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, he would only need to report $14,718 of taxable scholarship income, instead of $15,718.  

The IRS actually encourages use of this technique. From the form 1040 instructions: “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 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.