If I include the total amount of scholarship $ (used to pay tuition and fees) in income, can I then fill out form 8863 and get up to $4000 in qual. edu. exp. as a credit?

[morphbass]

Our daughter, who is  a dependent we are claiming on our 1040A received the scholarships. She is a 4th year student at university pursuing an undergraduate degree and this will be the 4th time we have claimed the American opportunity credit.  I am asking because the amount of scholarship $ exceeds the amount we were billed for tuition expenses.

[Carl]

All income must be reported for exactly what it is. TO do otherwise would be fraudulent in the eyes of the IRS. So if the scholarships exceed all qualified education expenses, nobody qualifies for education credits of any kind. Also, in the case where scholarships exceed the qualified education expenses, it's the student that reports the education stuff even though you are claiming them as a dependent on your return. That's because it's the student who will pay taxes on the excess scholarship money not used for qualified education expenses.

[Hal_Al · Accepted solution]

Yes. That is a tax “loophole” available. But, you can NOT report the income on YOUR return.  It goes on the student's return. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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 2. 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.

From the form 1040 instructions (pg 47): “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.”

You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 2. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Enter the 1098-T, exactly as received, on the student's return. In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.  

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T on the student's return or $4000 more in the box 5 amount.

[Carl]

Oh on the student's return! I though the parents were wanting to report scholarship income as earned income on the parent's tax return. Can't do that, of course, but that's how I interpreted the question.

[Hal_Al]

Good point, Carl. The question was worded that way. I have added that clarification to my answer.

[Carl]

Good deal. Because of the wording of the question, the loophole never occurred to me. Thanks for pointing it out to @morphbass though!

[morphbass]

Thanks for the input. I think I understand it more clearly now.

[migearellano]

Hello,@Hal_Al I understand this an old post but I continue to go to it because of your response, so thank you. I was wondering if you can assist regarding my situation. Let's say I am following this tax loophole and want to maximize the AOC credit, so 4000 is added to the parents return and 4000 is subtracted to dependents (tuition). Now, about 8000 is taxable scholarships due to the tax loophole, and 2200 is W2 income. My question is, since I have to file form 8962, do i need to include my dependents MAGI? I want to say yes because filing my dependents return would be required since the 1098T needs to be reported, correct? Thank you. 

[Hal_Al]

I'm not familiar with that form and that credit.  You may want to do a new post to attract an expert in that area. 

That said, I did a quick peek at the form 8962 instructions.  It seems to say no, you do not include his MAGI,  since his total income (8000 +2200 = $10,200) is below the filing threshold of $14,600 (2024)*. 

"Household income.

For purposes of the PTC, household income is the modified adjusted gross income (modified AGI) of you and your spouse (if filing a joint return) (see Line 2a, later) plus the modified AGI of each individual whom you claim as a dependent and who is required to file an income tax return because their income meets the income tax return filing threshold (see Line 2b, later). Household income does not include the modified AGI of those individuals whom you claim as dependents and who are filing a 2024 return only to claim a refund of withheld income tax or estimated tax."

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.