How does a dependent report less than $6300 of a pell grant as income in order to maximize my AOEC?

[111turbo111]

Need to have dependent choose to include enough pell grant as income in order to maximize my American Opportunity Education Credit, but not enough to incur federal or state tax. (He has no other income). But the problem is how do I or does he report that amount to the IRS? He cannot file a tax return showing $0 tax liability can he? One possible solution I considered was him filing showing a $1 tax liability, but that results in a $200 state tax. How can we report to the IRS the choice to include part of the pell grant as his income if that amount is less than enough to cause him to file a return?

[KrisD · Accepted solution]

According to the IRS:

“You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. See examples in Coordination with Pell grants and other scholarships, in chapter 2 and chapter 3.”

“If your only income is a completely tax-free scholarship or fellowship grant, you don't have to file a tax return and no reporting is necessary . If all or part of your scholarship or fellowship grant is taxable and you are required to file a tax return,”

"A scholarship or fellowship grant is tax free  only to the extent :

• It doesn't exceed your qualified education expenses;
• It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses;"

 "The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses, such as tuition and related fees, doesn't prevent the student from choosing to apply certain scholarships or fellowship grants to the student’s actual nonqualified expenses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student’s nonqualified expenses in income), the student may increase taxable income and may be required to file a tax return."

With the information above, as long as the student had "non-qualifying education expenses" to apply the grant to, such as room and board, and he has no tax liability, he would not need to file a return.

I would pen a draft (of your son's return) and keep it with your tax file in case you need to address the IRS about it later.

https://www.irs.gov/publications/p970/ch01.html

CLICK HERE for IRS Pub 970 Tax Benefits for Education

[111turbo111]

Thanks TurboTaxKrisD. Good answer and I understand. IRS should provide a way for taxpayers to report this situation so there wouldn't be the possibility of having to address later with delays in refunds or outright rejections when they look at the 1098-T and think you've got something wrong.

[KrisD]

I agree, but you should take the credits you deserve.