Maximizing American Opportunity Credit

[Z445]

Hi, I wanted to run this by the experts as I am trying to maximize my American Opportunity Credit. I have heard that Turbotax can be glitchy when figuring this out.

Currently, Turbotax desktop is showing an AOTC credit of $1,869 on my tax return. I was hoping to get the full $2,500 but cannot seem to find where in TurboTax I can make an adjustment to pay some income tax on 529 distributions to reach the 2,500 credit.

Also Turbotax is not allowing me by using the Step by Step to add any taxable 529. I guess this is possible by amending the 8863 form directly.

The form 8863 p2 shows

27 Adjusted qualified  educational expenses                          27|    1,869.

28 Subtract $2000 from line 27. If zero or less enter 0          28|           0.

29 Multiply line 28 by %25 (.25)                                                 29|            0.

30 If line 28 is zero enter the amount from line 27.                30|      1,869.  

Here is some information on my case:

1098T

Box 1 $11,099.02  (Qualified Tuition Payments)

Box 5 $2,666     (Scholarships)

1099-Q

Box 1 $20,428.15  (Gross Distribution)

Box 2 $10,684.71  (Earnings)

Box 3 $9,743.44   (Basis)

Additional Expenses

Expenses for Books and Material required to be purchased from the school:  $925.13

Room and Board:  $11,175

Computer: $1,764.47

The 1099-Q was issued to my (the parent’s) social security.

The scholarships my son received were applied directly to tuition by the university. They were to be used for tuition only, otherwise I would have had my son claim them as income on his tax return.

My son's total 2024 income was $2,242.66

I am filling married jointly for 2024 and AGI is $114,608

Thank you in advance for your help.

[Hal_Al]

In the 1098-T interview, you should reach a screen  called "Amount used to calculate education credit" (or similar wording).  Be sure the amount in that box is $4000. 

To get back there, Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education  Credit”, verify the amount you want to use or change it.  You may reach that screen sooner.

If you don't get that screen, check the student information worksheet. You can change it there (line 17). Make the change (enter 4000) in the first column.  

If that doesn't work, reply back and I'll give you the workaround. 

Books not purchased from the school re also a qualified expense. 

The AOTC is 100% of the first $2000 and 25% of the 2nd $2000. Your probably in the 22% tax bracket, so the 2nd $2000 doesn't get you much. 

[Hal_Al]

Tuition                           $11,099

Books & computer           2690

Room & board               11,175

Qual expenses               24,964

Scholarship                      -2,666

Used for AOTC                -4,000

Expenses for 1099-Q  $18,298

18298 /20428 = 89.57% of the distribution is qualified.  10.43% is non qualified

$10,685 x 10.43% = $1114 of the earnings is taxable. The 10% penalty does not apply because of the scholarship-education credit exception. 

[Z445]

Hi Hal_AI, Thanks so much for your help.

I do not have the option through the Step by Step to enter the $4,000. I was able to make the change in the Student Information Worksheet. When I go to the federal review option, Turbotax gives the following message:

"We'll make this entry zero that's no longer needed.

Earlier you told us to treat $4,000 as a taxable education in order to claim a larger education tax credit. However, it's no longer beneficial for any amount to be treated as a taxable distribution and used for an education credit, so we'll just make this entry zero."

If I click continue it removes the 4,000 from the Student Information Worksheet and replaces it with zero and my Federal Refund goes from $1,168 down to $675.

Should I just ignore doing the federal review?

Thanks again for all your help.

[Hal_Al]

You could try deleting the 1098-T and 1099-Q  and re-entering (enter the 1099-Q first).

That said, I'm gonna recommend the "workaround".

Delete the 1099-Q and 1098-T (delete the student). 

Enter the 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there.  Enter  $11099 tuition, 11,175 R&B, $2690 other expenses.  Also enter $6,666 (4000 + 2666)  in the box "Tax-free assistance".  This reports the earnings as taxable and claims the scholarship/Ed credit exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception. 

At the 1098-T screen, enter the 1098-T with $4000 in box 1 and box 5 blank (entering the 1098-T just as it is also works). This gets you the full $2500 credit. 

[Z445]

Hi Hal_AI,

Here is what I ended up doing and it has captured the $1114 as additional income on line 8 of my 1040.

Made the 4000 update on the Student Information Worksheet.

I skipped the Federal Review and did the Smart Check which said ready to check your federal return for errors. It came up with the 4,000 again and I had to check a box to do some type of review. It now shows when doing the smart check "Congratulations! We reviewed your federal return and found no error. If you feel I should do the work around instead let me know.  Thanks again.

[Hal_Al]

I assume you also got the $2500 AOTC.  So, no, you don't need to do anything else You got the results anticipated ($1114 income and $2500 credit).

You should also verify you didn't get charged the non qualified distribution penalty.  Verify that Form 5329 was generated and there is 0 on line 8. 

[Z445]

Hi Hal_AI,

Thanks again for all your help. Yes I received the 2500 AOTC and the 5329 form was generated and there is 0 listed on line 8.