How is the amount used to calculate education deduction determined?

[nbcobb]

Turbo Tax shows qualified education expense of 26,838 but the amount entered for the field "amount used to calculate education deduction/credit" is only 8202. How is the $8202 determined?

[JulieH1 · Accepted solution]

It is a bit complicated, but without seeing what you entered in your return, I will give you the information on how it is figured so you can compare and double check that it is correct:

Computing the credit

Step One: Computing total qualified education expenses. In order to compute the amount of the American Opportunity Tax Credit a taxpayer must first add up all his or her qualified education expenses. Generally, qualified education expenses are amounts paid during the tax year toward tuition and fees required for the student’s enrollment or attendance at an eligible educational institution. Often an educational institution will issue to the taxpayer a Form 1098-T, Tuition Statement, which includes the amount of tuition a taxpayer paid for that tax year. However, the IRS has warned that this amount can differ from the amount the taxpayer actually paid. For purposes of computing the credit, the IRS directs the taxpayer to use only the tuition amounts that he or she actually paid during the tax year.

Qualified education expenses do not include costs of room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. The costs associated with courses involving sports, games, or hobbies, or any noncredit course are generally not qualified education expenses unless such course or other education is part of the student’s degree program. As we stated above, taxpayers calculating the American Opportunity Tax Credit can also include amounts spent on books, supplies, and equipment that are required for a course of study in their qualified education expenses.

Step Two: Adjusting the amount of qualified educational expenses. The taxpayer must subtract from his or her total qualified educational expenses amounts received as tax-free educational assistance received during the tax year that are allocable to the particular academic period in question. Tax-free educational assistance includes:

• The tax-free part of any scholarship or fellowship;
• The tax-free part of any employer-provided educational assistance;
• Tax-free veterans’ educational assistance, and
• Any other educational assistance that is excludable from gross income (tax free).

“Tax-free” assistance does not include a gift, bequest, devise, or inheritance. It also does not include any portion of a scholarship or fellowship that must be included in gross income.

If after making these adjustments the amount of qualified education expenses exceeds the maximum credit of $2,500, the taxpayer can only claim $2,500. If the amount is lower than $2,500, the taxpayer can claim the whole amount. (Or less, if the taxpayer’s AGI is within the phase-out range. See Step Three, below.)

Step Three: Calculating any phase-out of the credit. A taxpayer whose AGI falls within the phase out ranges must reduce his or her credit amount ratably. To do this, the taxpayer should subtract his or her AGI from the top threshold amount ($180,000 for married joint filers; $90,000 for single filers, heads of household, and qualifying widowers). Next the taxpayer must divide the difference by either $20,000 (married joint filers) or $10,000 (single filers, heads of household, and qualifying widowers). The resulting quotient should be multiplied by the total amount of qualified education expenses after adjustments for tax-free educational assistance. The product of that should be subtracted from the total amount of qualified education expenses, after adjustments. The result is the amount of the American Opportunity Tax Credit the taxpayer can claim.

For example, if a single taxpayer in 2012 had $85,670 in AGI, he or she must subtract that amount from the top threshold amount for single taxpayers ($90,000). Then he would take the difference ($4,330) and divide it by $10,000. The quotient is .433, meaning the taxpayer must reduce his American Opportunity tax credit amount by 43.3 percent. If, the amount of the taxpayer’s qualified education expenses, after adjustments for scholarships, was $1,600, then the total credit amount that he could claim would be $891.20 because:

$1,600 – ($1,600 × .443) = $891.20

Here is the TurboTax official link on Education Expenses

https://turbotax.intuit.com/tax-tools/calculators/education/

https://turbotax.intuit.com/tax-tips/college-and-education/take-advantage-of-two-education-tax-credi...

https://turbotax.intuit.com/tax-tips/college-and-education/what-are-education-tax-credits/L7TuLrVqZ

[jon857]

I would think that to establish the $2500 AOC credit that the Qualified Educational Expenses must be $4000 or greater so that the two step evaluation process generated the maximum credit available. I don't understand your reasoning as to why someone with an AGI less than the phase out amount would be subject to an adjustment?

[Rob_Ma]

I have a similar problem/question on how the field "Amount used to Calculate Education Credit:" is determined and what its impact is in my daughters 2022 taxes. I 'm hoping @JulieH1 or @nbcobb  can help.

The TurboTax page titled "Education expense used for a tax credit" shows that my daughter's "total qualified education expenses are $31,281". This amount is the sum of the tuition paid in Box 1 of her 1098-T, $13,990 and additional eligible expenses of $17,291 (Room and board, eligible education expenses, paid from a 529 college savings withdrawal). 

This TurboTax page, gives an example" if the person who claimed you as a dependent also claimed the American Opportunity Credit for these expenses (which applies to the first $4,000 of education expenses), you would enter $4,000 below.

On the line below it has "Amount Used to Calculate Education Credit" and a box that is pre populated with $9,990. 

I believe the $9,990 was calculated from the 1098-T tuition payment of $13,990 less the $4,000 in scholarship the college gave her. 

With the $9,990 value in the box, my daughters Federal Refund is $64.

If I follow the example give, while I claimed my daughter as a dependent, I did not input any education information or expenses for her on the family taxes, so the value I should input to the box would be $0. Doing that increases her Federal refund to $108.

Which value is correct? 

Thanks for any help or advice provided.

[Hal_Al]

@Rob_Ma  The simple answer is $4,000 (change the 9990 to 4000).   But, because of the 529 distribution, it's more complicated than what's entered in that box. Your daughter cannot claim the American Opportunity Credit (AOC) on her return. You should be claiming the AOC.

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• What is the student's age as of 12-31-22
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. 
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible, there is an income limit)?
• Is the student an undergrad or grad student?

________________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. 

[Rob_Ma]

Hello @Hal_Al , firstly thanks for your reply and for all this great information. Great learning for me an I truly appreciate the help.

Let me answer your questions first:

• Are you the student or parent. Parent
• Is the  student  the parent's dependent. Yes, she is a dependent on my taxes. 
• What is the student's age as of 12-31-22. 20 years old 
• Box 1 of the 1098-T. $13,990
• box 5 of the 1098-T. $4000
• Any other scholarships not shown in box 5. None
• Does box 5 include any of the 529/ESA plan payments (it should not). No it does not.
• Is any of the Scholarship restricted; i.e. it must be used for tuition. I dont believe it is restricted. From the college scholarship T&C it states: "Disbursement of Scholarship: One-third of your yearly scholarship amount will be disbursed to your student billing account each term." Each term the billing includes: tuition, room and board, other fees.
• Box 1 of the 1099-Q: $19,806
• Box 2 of the 1099-Q: $6,639
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)? Student, my daughter
• Room & board paid. Yes, 2022 was $17,291
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers. No, other than the room and board above.
• How much taxable income does the student have, from what sources. Two part time jobs, $5,600 in 2022
• Are you trying to claim the tuition credit (are you eligible, there is an income limit)? TurboTax said I (parent) was not eligible due to my earnings.
• Is the student an undergrad or grad student? Undergrad.

The students college expenses $31,281 were greater than her scholarship $4,000 and 529 withdrawal $19,806. Given that, I assumed here taxes would be based solely on her job income. However, when including the college, her taxes increase and her refund decreases. 

Thanks again for your help.

[Hal_Al]

Q. The students college expenses $31,281 were greater than her scholarship $4,000 and 529 withdrawal $19,806. Given that, I assumed her taxes would be based solely on her job income?

A. Correct. 

Q. However, when including the college, her taxes increase and her refund decreases?

A. TurboTax (TT) just doesn't do a very good job with the "information overload". 

Delete the 1098-T and 1099-Q.

The 1099-Q and the  1098-T are only informational documents. The numbers on them are not required to be entered onto your (or your student's) tax return.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms or is sent to the IRS. But, it will prepare a 1099-Q worksheet for your records. 

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. 

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T.  You are not eligible for the credit and you know none of her scholarship is taxable.

[erica28]

I have a similar situation. My son received a 1098-T and a 1099-Q from the 529 plan we have for him. I (his mom) also received a 1099-Q because some of the distribution went to me. Now I'm trying to figure out what to do on my taxes and what to do on his taxes. Seems very complicated.

[Hal_Al]

It is very complicated, as you can see from the above discussion.  It's best if you keep you questions to a single thread.

https://ttlc.intuit.com/community/college-education/discussion/confused-about-american-opportunity-c...

[KrisD15]

It is somewhat complicated. 

It is always best to have the distributions sent directly to the school or issued to the student. 

If the student is your dependent, I suggest you enter both 1099-Q's and the 1098-T into your TurboTax program so that your TurboTax can do the calculations. 

Your program will tell you what the student needs to claim(if anything) and also try to get you an education credit. 

IF THE STUDENT IS NOT YOUR DEPENDENT, he would use the 1098-T and report his 1099-Q, HOWEVER he would also need to adjust the amounts on the forms to suit your situation. For example, if your distribution was entirely used for room and board, great, you needn't enter the 1099-Q since it won't be taxable income, and you needn't adjust the 1098-T since room and board expense is not listed on a 1098-T. If you took a 2,500 distribution to pay tuition, Box 1 on the 1098-T would need to be lowered by 2,500 if you want your distribution to be tax-free.

Sometimes the program will suggest the student claim some of the scholarships and/or distribution so that you can get an education credit if it thinks the tax the student pays will be less than your credit. This decision is based on an assumption since your TurboTax does not communicate with his TurboTax. 

Sometimes the program will suggest you take the American Opportunity Tax Credit. That credit can only be taken four times per student. School usually spans over five calendar years, so it might be better to save a credit for the last year rather than take it the first year. 

The IRS DOES get a copy of Forms 1099-Q and 1098-T, but they are not like many other forms where there is a specific place on your tax return to list them. These forms serve two purposes, to calculate an education credit and/or generate taxable income. With these forms, the Taxpayer has some choices as to what they want to accomplish (credit, taxable income, neither) so it is very difficult to give advise without knowing the circumstances. 

As I said, I suggest you read Pub 970 or let TurboTax make the choices for you when you click "Maximize My Tax Break" after entering the forms. 

IRS Pub 970

@erica28