Is my non-dependent child elligible for the American Opportunity Credit if i paid her tuition from a 529 plan?

[jay4]

In 2018, year my daughter no longer qualifies as my dependent.  However, i paid her tuition from a 529 plan in my name (i receive the 1099Q - she is the beneficial owner).  She, however, receives the 1098T. I enter the 1098T and 1099Q info on my return since not all of the 529 funds were spent 100% on education, so the non-educational amounts are taxed as income to me.  However, when working on her return, she enters the 1098T info & since she is no longer a dependent, TurboTax determines she is elligible for the American Opportunity Credit.  Is she eligible for the American opportunity credit even though i paid the tuition?  (i later withdrew funds from the 529 to cover the payment).  Or is it a mistake to enter the same 1098T info on both returns?  Also, we've never claimed the credit before as she was a dependent..

[PhyllisG]

Only one person can enter the Form 1098-T on their tax return.  If a child is no longer considered a dependent then they may be able to claim the American Opportunity Credit or other education credits.  The education credits and deductions are driven by the Internal Revenue Service (IRS) dependency rules. TurboTax has determine that your daughter's income situation has allowed her to take the American Opportunity Credit.

However, a person cannot double-dip tax breaks.  In other words, a credit cannot be claimed for the same expenses that were paid with a tax free money education plan. Your daughter will need to report the Form 1099-Q (assuming that she is named as the beneficiary of the plan) on her tax return and report the non-educational amount as income. The reasoning is because the student pays the taxes on any excess scholarships, grants, and 1099-Q funds.

Please refer to the IRS Publication 970. The taxability of the excess amounts begin on page 52 and is explained with examples.

[jay4]

that is the crux of the question still - she is not the named person on the 1099Q - I am.  Although she is the beneficiary.  Based on what i understand she cannot report the 1099Q - are you suggesting she can?

[jay4]

maybe i can be clearer... i will report the 1099Q and any resulting non-educational expenses - TT lets me enter non-dependent educational costs in the 1099Q section.  I don't have to enter the 1098T info on my return at all.  Then on her return, she reports the 1098T, but not the 1099Q (because it's in my name and my ssn).  If i had zero non-educational costs, then i wouldn't have to enter 1099Q info on my return at all - either way, i'm not getting a deduction at all, i'm just paying the tax / penalty on any distributions from the education plan.  She enters the 1098T info - TT states that there's no tax deduction resulting from the tuition & fees, but does state the American Opportunity Credit is available.  That doesn't sound like double dipping to me - or what am i missing?  thanks

[PhyllisG]

You daughter can not claim qualified education expenses that were paid with tax-free scholarships or fellowships, federal Pell grants, tuition grants from an employer, refunds from the school, and other non-taxable assistance to compute the American Opportunity Credit. The form 1099-Q is generally considered a non-taxable event.

The IRS is clear that the American Opportunity Credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Qualified Tuition Program (QTP), as long as the same expenses aren't used for both benefits. The key words are "same expenses." Therefore, if the QTP only paid her tuition but not other qualified expenses (e.g. course related books and supplies), then minus the tuition, she can claim the other expenses to compute the American Opportunity Credit.

Your daughter (as a beneficiary) will still have to report the excess contributions by doing the following in her return even if the Form 1099-Q is in your name:

1. Select the Personal Income or Wages and Income tab
2. Click the "I'll choose what I work on" button
3. Scroll down to Less Common Income
4. Click Start next to Miscellaneous Income, 1099-A, 1099-C
5. Scroll down to Other reportable income and click Start
6. Click the Yes button on the “Any Other Taxable Income?” screen
7. Under the “Other Taxable Income” screen, type "Excess 1099-Q Dist"
8. Click Continue

[jay4]

ok, thanks, i think you're telling me that if all of her tuition, room and board are paid with 529 funds, then she is ineligible to claim the american opportunity credit.  So, why is TT showing that she gets that credit?  I entered the 1099Q directly on her tax form as if she had received it herself so TT should clearly see that all of her expenses were covered by proceeds from the 529.  yet it is still showing she is eligible for the credit.  Is it possibly because that only the investment gains represent the non-taxable event?

[jay4]

so what  appears to be happening is that the taxable portion of the 1099Q appears to be a function of (a) the qualified expenses amount you wish to base the American Oportunity credit calculation on, and (b) the earnings portion report on the 1099Q for the 529.  in the interview for the 1098T, it tells you the amount of qualified education expenses and asks how much of that amount you wish to use in the calculation of the American Opportunity Credit.  If i put in 0, i get no credit, and if i put in $4000, i get the maximum credit amount.  And at $0 credit almost all of the 529 distribution is non-taxable, but if i claim $4000 in credit i pay more tax on the 529 earnings.  I did find something in the instructions for form 8863 that says you have to reduce your qualified expenses by any tax free amounts such as tax free scholarships.  TT, however, is not preventing me from using $4000 of expenses to calculate the opportunity credit.  (I even tried playing around with the 1099Q numbers to see if i could get TT to prevent me from using all $4000 for the credit - i couldn't.)  So, do i assume TT is correct in allowing me to select to use $4000?  or is TT depending on me to figure out that i'm not allowed to do that.  i can't determine the answer from reading the pubs - none of the examples are close enough to my situation.  It'd be much simpler if TT would just connect the 1099Q and 1098T interview sections and just automate this.  but would appreciate hearing what the right answer is here.  thanks.

[jay4]

& here's another answer that suggests what i'm observing is both legit and in fact what is happening: <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4006656-can-i-still-use-the-american-opportunity-credit-if-i-paid-...>