How much of scholarships do you want to allocate to "room and board and noneducational expenses?"

  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 an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

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, she would only need to report $5000 of taxable scholarship income, instead of $6000.

In the 2nd example, you tell TT that you want $5000 of the scholarship to be allocated to Room and Board. 

In your case, since student only has $1007 of other income, the additional $6974 (quick calculation) of taxable scholarship is not enough to generate a tax liability. He does not even need to file. 

Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.

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”.

Thank you. 

$16,950 of the scholarship money was issued strictly for tuition use only. Would that change things here?

Q. $16,950 of the scholarship money was issued strictly for tuition use only. Would that change things here?

A. Yes. $18,840 - 16,950 = $1890  of the tuition can be used to claim the American Opportunity credit (AOTC).  $1890 + $514 of other expenses = $2404 of net qualified expenses. That is still enough to get you $2101 of the maximum $2500 AOTC. 

Ok. So does that mean I enter the $1890 for the question asking "how much do you want to allocate for room and board"? 

Or this is entered elsewhere?

And then do I need file taxes for my student separately also? As the $1890 would be more than the $1250 unearned income allowed, is that correct? Even tho my students earned income was only $1,007.

Or I don't use the $1890 to decide if my student needs to file, I use the $2,460 (difference between scholarships received and qualified tuition amounts on the 1098-T). I'm confused by this part.

Sorry for all the questions, just want to make sure I don't mess this up. 

Enter $4350 as the amount of scholarship for room & board. 

The math:

Remaining Expenses: $18,840 - 16,950 = $1890 + 514 = $2404

Remaining Scholarship: $$21,300 - $16,950 = $4350

By allocating all the remaining scholarship for R&B, it frees up all the remaining expenses for the AOTC. 

Ok.  Yes, that makes sense. Thank you!

Now what about my students taxes? They wud need to file now, is that right? Due to part of scholarships being used for R&B (not a QEE). 

That adds $4350 to their income, as unearned income correct? (Over the $1250 limit) Since it's excess scholarship money being used for non QEE. Or am I not understanding that part right?

Q. Do I need file taxes for my student separately also? 

A. No. 

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400). The $1250 threshold does not apply. 

It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For undergrads, it is not earned income ("compensation") for IRA contributions. 

Awesome! That's good to know. This makes sense now. Thank you again for all your help. 

@Hal_Al 

After going thru all my documents and double checking receipts (to have accurate amounts).

I wanted to ask about laptop purchase, we did buy him a laptop for college. I saw you listed computers up in one of your previous answers, should we add his laptop cost ($1,025) to answer the question "books, materials and equipment purchased that you didn't have to buy directly from the school"?

That would make it: $1527, instead of just $502 

($1025 laptop +  $502 books = $1527)

$96 graphic calculator (wud this count too?)

Thank you. 

Yes, if the laptop was a requirement for school, you would include it as equipment not purchased from the school. 

Thank you Vanessa.

Would the calculator count then as well?

And do I need to reduce the amount allocated to R&B if I add the laptop/calc?

Or its fine to leave the allocated amount as is?

Yes, a calculator would count as well.

If you are trying to claim the AOTC, having expenses greater than $4,000 will not make a difference in the credit.  The credit is calculated with the first $2,000 of qualified expenses 100% eligible for the credit with the next $2,000 eligible at 25% for a total of $2,500.  

Yes, you would reallocate the amount for room and board.  The reason to remove from Room and board would be to lower the taxable scholarship amount. 

@Vanessa A ,

When I go in and try to reduce the R&B allocation, it completely reduces my AOC down by almost $2,000. So I feel like I have made a mistake somewhere...but not exactly sure where?

Do I need to enter the $1,890 remaining tuition amount that Hal_AI mentions above along with the "other expenses" together in the same box? (I have gone back up thru the thread and reread it a few times and I think I made a mistake somewhere there.

Currently I have: 
$18,840 - $16,950 = $1890

@Hal_Al 
If you have a minute, I am a bit stuck on where to enter in the $1890 of the remaining tuition in the form you helped me with yesterday? 

I have two questions asking:

Cost of books and materials that you had to buy directly from the school: Ans: $85 (book from univ bookstore)

Cost of  books and material that you didn't have to buy directly from the school Ans: $1538 (books, laptop, calculator)

If you paid more Tuition than what is indicated in Box 1 on Form 1098-T, click the link under the entry field that says 'what if this was not the amount paid to the school'.

A field will open up for you to make your entry of the correct tuition amount.

@MidMoMom24 

@MarilynG1 

We didn't actually pay more tuition than listed on the 1098-T
But Hal_AI had given me a way to figure things to get the AOTC. He said to take the scholarship that was restricted to tuition only ($16950) and subtract it from the total scholarship received ($18840) which gives a balance of $1890 left of tuition money that can be used to figure the AOTC - (he had given instructions on how to use that to receive the AOTC credit), but I am not find where to enter the $1890 amount.  So I am a bit stuck now. Is there a way that you know of to do this?

Thank you for trying to help me. I am stuck currently and was hoping to figure this out in time to file.

Enter the 1098-T, on your return, with $1890 in box 1 and box 5 blank.  Enter the $1538 in the books section.  That should give you $3428 Total net expenses for the AOTC, resulting in a credit of $2357. 

Form 8863 does not break down expenses. If you were entering numbers directly on form 8863, you would enter only $3428 as Adjusted qualified education expenses on line 27.  So, an even shorter short cut, in TT, is enter the 1098-T with $3428 in box 1 of the 1098-T , 0 in box 5, and not bother with any other entries. 

@Hal_Al 

I tried that...and it gives me an error when I try to allocate to the R&B amounts, saying I need to fix the zero balance of scholarship if I want allocate to R&B.

Is there another way to try this? Or to show the $1890 where it needs to be? Without the $1890 showing somewhere on the 8863 does that mean we cannot take the AOTC? 

@Hal_Al 
Its still giving me the error and asking me to 'zero out' line Line 4 (what we allocated for R&B) as it cannot be larger than line 2c (which is zero for $0 "Scholarships, fellowships, and grants not reported on Form W-2").

Does the $1890 need to show anywhere in the forms for us to qualify for the AOTC?

If not, I can just increase the R&B to offset the amount needed to get the AOTC (because our student doesn't have an income amount, so no need to file taxes for him) , but I don't want to do that if its wrong or will create an error or red flag somewhere along the way.

Q. Is there another way to try this?

A. Yes.

You're getting bogged down in entry details and it messing things up. Your chances of getting TT to do this right in the standard interview are slim. You need to use a short cut. This thread is long and convoluted and I'm involved in several others, so I don't have all your details sorted out in my head. But, I think this is where we are:

It can be simplified, because you appear to have the bottom line numbers. 

  -You have $3428 of adjusted qualified expenses for the AOTC

  -The student needs to report $4350 of taxable scholarship, if he is even going to file

Delete everything, in the  1098-T sections,  on both your return and the student's return. On your return, re-enter the 1098-T with $3428 in box 1 and box 5 blank.  Re-enter the 1098-T, on the student's return with $4350 in box 5 and 0 in box 1.  Enter no other numbers. 

@Hal_Al 

Okay, thank you. I just was not sure where else the numbers I key in from the 1098-T go? I was not sure if the software populates it in other areas? (like 1040 or anything like that, and didn't want to enter anything in that was not accurate for the IRS). I have even tried keying our taxes into 3 other online software's trying to make this work. Its been a longggg week. I really appreciate you taking the time to help.

I did try what you mentioned and it dropped the refund another $88, so I am not sure what I have done here? But I think you're right, its become long and complicated for sure, so I am likely messing something up along the way on my end.

IF I enter $1623 for the "qualified books & equipment" (and leave off the $1890 of the remaining tuition and QEE that there is no blank for) and $4350 for R&B and leave the 1098 as it is (with $18840 in tuition, $16950 of that strictly for tuition, that leaves me the $4350 for R&B) then if I enter in the listed $21,300 for scholarships received.

It gives me an AOTC credit of $2,378 - I am okay with that (and it shows $3513 on the worksheet as QEE on the tax program that lets me view the 8863 form - so it must have a way to calculate/add in that $1890 that I am not aware of). I just didn't want to leave $2,500 on the table, I can live with leaving the extra $122. It is frustrating that I cannot figure out what I am doing and where, no fault of yours - you've been a great help. 

Also, I do not have a 1099-Q, so I think I am okay there?

And our student only has $1000 in income, so I think we are safe not filing anything for them also?

(I will try to add a pic of the worksheet amounts I am referencing from the 8863 worksheet it produced.)

I'm not sure how you did it, but you were apparently successful at arriving at the correct outcome (+/- $2378 AOTC).

I deleted my reference to 1099-Q. It doesn't apply in you case (I mixed you up with another thread).

Q. Our student only has $1000 in income, so I think we are safe not filing anything for them also?

A. Yes.  

@Hal_Al 

At this stage, even Im not sure how I did it?

My only hope is that it's right. 🙏

Does that AOTC amount sound about right for our numbers?

$21,300 in scholarships ($16950 restricted to tuition only leaves $4350 for R&B)

$18,840 in QEE from 1098 (tuition & univ fees)

$1623 additional QEE (books & equipment)

$4350 of scholarship money allocated to R&B

It created 2 worksheets to populate the 8863, this is the second one. Does it seem to look ok to you? (These numbers below don't make any sense to me, the first worksheet did. But as long as it's accurate I'm ok. I'm not trying to get more than we're owed, just don't want to lose what's ours. ) And thank you again!

Q. Does that AOTC amount sound about right for our numbers?

A. Yes.