Dependents Educational Assistance

[jonesturtle]

Do I need to report Dependents Educational Assistance (Chapter 35 DEA) received when applying for the American Opportunity Tax Credit?  There is a lack of information related to this specific benefit which is different than the GI Bill.  The examples for the GI Bill state any portion paid directly to the school would be reported against tuition paid, but the housing allowance paid directly to the student with no restrictions is not supposed to be reported. Those familiar with the Dependents Educational Assistance benefit know the payment is sent directly to the student and none of it to the school and essentially is the same as housing allowance by having no restrictions.  It is not on reported on the 1098-T and no other tax forms record these payments. I'm hoping to find references to better understand why or why not.

[Hal_Al]

Yes. At the scholarship page, in TT, you will be asked to enter your Veterans benefits.  Because it is tax free, the portion that is designated for Tuition, even though sent to you, rather than the school, must be counted as applied to tuition.  That is, you must reduce the amount that can be counted toward the  American Opportunity Tax Credit (AOC).

In TT, at the Scholarship page,  in the VA benefits box, enter only the portion of your benefits designated for tuition.  TT will automatically make the reduction in the AOC calculation

[jonesturtle]

But how do you determine which portion of the benefits are "designated" for tuition?  It is a flat monthly benefit, the same no matter which school you attend. It doesn't appear any of the benefits are "designated" for tuition, just like the housing allowance with the 9/11 GI Bill has no restrictions. I have not found any documentation related to the Chapter 35 Dependents Educational Assistance benefits which is paid differently than the GI Bill.  It appears the answers are given without being familiar with this unique benefit.  Obviously the safe answer is to report it as if they are all designated for tuition, but based on the way the unrestricted GI Bill housing benefits are explained, it leads me to think these are unrestricted as well.

[ColeenD3]

This is from the link below.

Benefit payment:
We pay the monthly amount directly to the student. The current monthly payment for full-time training is $1,224.

VA DEA

[jonesturtle]

Yes, exactly.  Doesn't that mean there is no restriction on what the money can be used for which means it doesn't get reported as paid for tuition against education tax credits just like the housing allowance portion of the GI Bill isn't reported?

[KrisD15 · Accepted solution]

Yes, you are correct. 

The housing allowance is not reported AND that amount has nothing to do with earning an education credit. It DOES NOT reduce the tuition paid. 

Chapter 35 DEA is administered through the VA and treated the same as a basic housing allowance. 

According to the U.S. Department of Veterans Affairs:

Any veterans’ benefits paid under any law administered by the Department of Veterans Affairs (VA) should not be reported as income to the Internal Revenue Service (IRS). You will not receive a W-2 from the VA.

Per IRS Publication 970:

"Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Do not include these payments as income on your federal tax return.

If you qualify for one or more of the education benefits discussed in chapters 2 through 13*, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. This applies only to the part of your VA payments that is required to be used for education expenses.

Example.

You have returned to college and are receiving two education benefits under the latest GI Bill:

1. a $1,534 monthly basic housing allowance (BAH) that is directly deposited to your checking account, and $3,840 paid directly to your college for tuition.

Neither of these benefits is taxable and you do not report them on your tax return. You also want to claim an American opportunity credit on your return. You paid $5,000 in qualified education expenses (explained in detail in (explained in detail here in IRS publication 970, chapter 2). To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. You do not subtract any amount of the BAH because it was paid to you and its use was not restricted."

VA Source