Lifetime Learning Credit confusion

[Graduate Student]

My PhD student fellowship (box 5 on 1098-T) exceeds the tuition (box 1) by $13,000. To show this as taxable, I entered this as being used for room and board, which worked to show it as income. However, TT also put the same $13,000 on line 31 of form 8863, which then generates the $2,000 lifetime learning credit in my return. I think I answered all the questions correctly but not sure I’m qualified for the credit. 

[DavidD66]

If the $13,000 is showing as taxable income on your tax return it is also eligible income to determine if you qualify for the Lifetime Learning Credit.  Sounds like you qualify for the credit. 

[Hal_Al]

You are correct, that $13,000 should not be there.  It's most likely an entry error.  What are your box 1 and box 5 amounts? Do you have any book or computer expenses? Books and computers are not qualified for the LLC but they are for tax free scholarship. You may need to delete the 1098-T and start over. 

[Graduate Student]

Box 1 is $58,936 and Box 5 8s $72,640, so the difference is $13,704. Book and computer expenses (not paid to university) are around $380, so don't make much of a difference. 

I already deleted the 1098-T once and reentered it.  TT correctly shows in the tuition and fellowship in the education section of deductions and credits. 

The $13,704 shows up as income on Schedule 1, line 8r, which goes to line 8 on 1040. I had to trick TT to get it reported by saying it was used for room and board. 

Now I have one response saying that if it's reported as income, I can take the credit and yours that says I can't! 

[Hal_Al]

Don't ya hate when that happens! One rule of thumb, when you get competing answers: assume TT is right.

You can claim the credit if you report $23,704 of scholarship as income, freeing up $10,000 of tuition for the credit.  The LLC is non refundable, so you would have to have a $2000 tax liability.  You could report less to wipe out a smaller tax liability.

Try this: When asked if any of the scholarship was used for R&B answer no. TT should automatically treat the difference between box 1 and box 5 as taxable, without being tricked into it.  It sounds like the $13K is being double counted. 

[Graduate Student]

I wonder if it's a glitch in TT. If I say "no" to the R&B question, the $13,704 isn't captured as income anywhere. That's how I started That's consistent with other posts that say you have to answer "yes" to the R&B quetstion to get the income to show up on line 8.

If I do as you suggest and report $23,704 as income, then my tax goes up by $1200 compared to getting the $2000 credit (I have some W2 income so tax bill is enough to get full credit). That's $800 better than nothing, but my state tax also goes up by $425 since Michigan doesn't also apply a credit. Not sure it's worth dinking around for the difference between a $2000 credit and $1645 in additional tax due to the higher income report. 

Maybe the real question is what happens if I assume TT is correct, take the $2000 credit and shouldn't have? 

If I have to assume TT doesn't know what it's doing and go in and delete the Education Credit form from my return, that might remove the credit. TT says it guarantees the results, but not sure if that's comforting enough!

[Graduate Student · Accepted solution]

I think I figured it out. I answered the question "Did your Aid Include Amounts Not Awarded for 2024 Expenses" as "yes" and entered the $13,704. I thought this meant was any of the amount not directly tied to a qualified expense, but reading more carefully, it means was any of the scholarship for an expense in a different calendar year. When I change that answer to "no", the $13,704 shows up as income and the credit disappears.

Thanks so much for your help!

[Hal_Al]

Thanks for letting me know. I'll be on the lookout for that in the future!