Can I claim the American Opportunity Tax Credit by listing scholarship money as income if the scholarship is greater than my qualified educational expenses by $4000?

[rock189]

While reading the 2016 version of IRS form 970 regarding eligibility for the AOTC, they note that you can claim the tax credit if you list part of your scholarship as income regardless of whether or not your college used part of your scholarship money to pay off qualified education expenses. The following paragraph is confusing however:

"Coordination with Pell grants and other scholarships: You may be able to increase your American opportunity credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student's gross income. Your credit may increase only if the amount of the student's qualified education expenses minus the total amount of scholarships and fellowship grants is less than $4,000. "

Does this mean that if I had qualified expenses of $5000 and my total scholarship money was $10,000 I wouldn't be able to list part of scholarship as income and claim the AOTC? If instead I had qualified expenses of $5000 and a total scholarship of $7000 then I could claim the AOTC?

[Bsch4477]

In your example, to maximize your credit you would claim $4,000 of qualified expenses for the purpose of claiming the AOC.  You would apply $1,000 of scholarship money toward the rest of the expenses to account for the total of $5,000. That leaves scholarship income of $9,000 which is taxable to the student. 

[nrjank]

can you clarify how that manual adjustment is done in turbotax for both the parent claiming the credit and the student claiming the extra income?  For the latter, I assume some change needs to be made in the section reporting education expenses and scholarships (1098T portion) but it's not clear which box to adjust by the 1000

[Bsch4477]

First be sure that the student has a filing requirement. If they have no other income they might not have to file at all. 

if filing is required the student goes to Deductions/Credits >Education and Scholarships and follow the interview. 

They should be able enter the scholarship income in the screen which shows "Did you pay for room and board with a Scholarship or Grant ? Here you need enter how much of the Sch/Grants you paid for Room and Board. This will be added in 1040 Line 1 as SCH.

[Hal_Al]

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 1. 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.