If we don't claim our student as a depedent, why does she receive an education credit?

[catkik]

My student received scholarships that covered all of her tuition last year and she paid about $1800 out of pocket for room and board. She worked through a paid coop, so she made $38,000. I wanted to see how TurboTax will calculate her taxes if we don't claim her as our dependent.  It calculated full Education credit in this scenario. I was wondering why? Was that a mistake? 

[Hal_Al]

 Q. It calculated full Education credit in this scenario. Was that a mistake? 

A. Probably not.  It depends on how it is entered. 

There is a provision that allows your student-dependent to claim a federal tuition credit.  A full time student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable).

So, either because she supports herself by working or has a high enough tax liability,  she gets the AOC.

Q, What about the fact that her tuition was paid by scholarship?

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 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.

The $1800, paid for room and board, is not a qualified expense  for either a tuition credit or tax free scholarship.

[Vanessa A]

I would like to take a deeper look at this. However, I need a diagnostic file which is a copy of your tax return that has all of your personal information removed. You can send one to us by following the directions below:

TurboTax Online:

1. Sign into your online account.
2. Locate the Tax Tools on the left-hand side of the screen.
3. A drop-down will appear. Select Tools
4. On the pop-up screen, click on “Share my file with agent.”
5. This will generate a message that a diagnostic file gets sanitized and transmitted to us.
6. Please provide the Token Number that was generated in the response.

TurboTax Desktop/Download Versions:

1. Open your return.
2. Click the Online tab in the black bar across the top of TurboTax and select “Send Tax File to Agent” *
3. This will generate a message that a diagnostic copy will be created.  Click on OK and the tax file will be sanitized and transmitted to us.
4. Please provide the Token Number  (including the dash) that was generated in the response.

*(If using a MAC, go to the menu at the top of the screen, select Help, then, “Send Tax File to Agent”)

[user17719025492]

Thank you for your help!

Here is my token number - 1333567

[user17719025492]

Thank you for your help!

Here is another question to verify -

T-1098 box 1 shows $7110, box 5 - $5303 for scholarships received. But only $3100 went towards tuition and fees. The rest $4000 were covering housing - $2500 was scholarship and the rest $1800 was out of pocket. So when TT asks what part of the scholarships covered room and board, do I show the full $4000 or only part that was paid by scholarships ($2500 or so)? 

[user17719025492]

can you look at the token?