if I choose to include part of tax free grant in student income and claim AOTC, should I reduce my 529 AQEE with this amount?

[xu3]

my student has tuition and fee + books=9155,

total tax free grants scholarship=7948,

room and board +laptop =8433

student loan=2227

9155-7948=1207 can be used for AOTC,

AQEE for 529 =8433, so I can withraw 8433 tax free from my 529.

if I include $2793 grant scholarship in student gross income, then, I can get $4k expenses to claim AOTC,

Is my 529 AQEE still 8433 or will be reduced to 8433-2793=5640?

[Hal_Al · Accepted solution]

Q. If I include $2793 grant scholarship in student gross income, then, can I get $4k expenses to claim AOTC?

A. Yes.  That's exactly how the scholarship as income loophole works.

Q. Is my 529 AQEE still 8433?

A. Yes.

Q. Or will be reduced to 8433-2793=5640?

A. No.  The tax free scholarship amount of $2793 shifted to taxable scholarship. $2793 of expenses shifted (from being allocated to tax free  scholarship) to the AOTC.  Nothing happened to change the 529 AQEE. 

AOTC - American Opportunity Tax (Tuition) Credit

AQEE - Adjusted Qualified Educational Expenses 

[xu3]

thanks a lot!

[xu3]

one more question, the 529 AQEE of 8433 are partially paid by student loan of 2227,  should I reduce the 529 AQEE of 8433 by loan of 2227, so my tax free 529 AQEE becomes 6206?

[Hal_Al]

Q. The 529 AQEE of 8433 are partially paid by student loan of 2227,  should I reduce the 529 AQEE of 8433 by loan of 2227, so my tax free 529 AQEE becomes 6206?

A. No. The student loan is irrelevant and can be ignored. It would be no different than if grandma had given you $2227 to help pay for school. The are both just "your money".  One is borrowed money and the other is gifted money. 

[xu3]

great thanks!

I, the parent, if choose to treat $3k of my student's grants as taxable income, to claim more AOTC in my tax return and my student does not need to file tax return based what you told me. if my son does not file a tax return,  I wonder how the IRS know these information between me and him, and know my son is not required to file a tax return?

[xu3]

Dear sir

I tested using TT to do tax return, after I input the 1098T and 1099-Q, there is no way I can make choice to treat part of student's grants as taxable income. Do you know where to find the choice in TT? thanks!

[Hal_Al · Accepted solution]

Q. I, the parent,  choose to treat $3k of my student's grants as taxable income, to claim more AOTC in my tax return and my student does not need to file tax return based what you told me. if my son does not file a tax return,   how does  the IRS know these information between me and him, and know my son is not required to file a tax return?

A. They don't know. You just hope that you can explain it away if you hear (unlikely) from the IRS. Some people recommend that you have the student file a tax return, even though it is not required, to document his reporting the scholarship income. 

Q.  Where,  in TT, do I make choice to treat part of student's grants as taxable income? 

A. I assume you entered the scholarship at the 1098-T screen (box 5).  The interview will ask if any was used for room and board, answer yes. Then enter the amount you want to be taxable ($3K, in your case), in the pop up box. R&B are not "qualified educational  expenses".  So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.  

The interview can get complicated, particularly when you're also entering a 1099-Q.

There are a couple of workarounds.  First, just don't enter the 1099-Q.  

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. But, it will prepare a 1099-Q worksheet for your records. 

References:

1. 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." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

Second, when you enter the 1098-T, reduce the amount of scholarship, in box 5, by the amount the student will be claiming as income ($3K, in your case). Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. You can skip the questions about scholarship and room & board. 

[xu3]

Thanks a lots! you are so great.  I really appreciate your kindness. 

May I ask a question on 529 distribution? the 970 pub says

"The expense for room and board qualifies only to
the extent that it isn't more than the greater of the fol
lowing two amounts.
a. The allowance for room and board, as determined
by the school, that was included in the cost of at
tendance (for federal financial aid purposes) for a
particular academic period and living arrangement
of the student.
b. The actual amount charged if the student is resid
ing in housing owned or operated by the school."

In university website's COA, the R&B is 7664 for his major of 2024 fall. 

my son is residing in hose owned by school, the actual charge is 7443. 

can I withdraw tax free 7660 from my 529? 

[Hal_Al]

Q. In university website's COA, the R&B is 7664 for his major of 2024 fall. 

my son is residing in house owned by school, the actual charge is 7443. 

can I withdraw tax free $7660 from my 529? 

A. No. You can only withdraw $7443, tax free. 

[xu3]

Thanks for reply. 

In additional to eat in school dinning halls, my son sometimes eat in fast food and restaurants. These outside dinning expense is more than the difference  ($221) between school allowance $7664, and school's acutal R&B charge $7443. Can the difference $221 be treated as qualified 529 expenses.

My son's university is just 30min drive away from my house, so my son comes back to live with us during weekends ( even his R&B plan includes weekends).  School's COA lists $6166 expense for student who live with parents and commute to campus. Can the expense living at home be treated as qualified 529 expenses?

[Hal_Al]

Q.  Can the  outside dinning expense difference $221 be treated as qualified 529 expenses?

A. Yes. 

Q. Can the expense living at home be treated as qualified 529 expenses?

A. Food ("board"), yes. Lodging ("room"),  no, since it overlaps the on campus "room" cost.