American Opportunity Credit-scholarship exceeds tuition

[blues2]

Child received 1098t for 9057 qualified expenses.  Scholarships are 18720.  All scholarship used for college expenses.  Can I get the credit?  TT says no.  But I'm seeing work arounds for this.  Will my child have to pay taxes on this?  I've worked through a couple of scenarios.  Can I just claim $2000 of the 1098t and not get the full $2500 and reduce the amount in Box 1 by the $2000 and claim that and the scholarship on my child's tax return.  Looks like claiming the full $4000 on mine gets me the full $2500 but in doing so and having to reduce Box 1 by the $4000 on my child's tax return, my child is having to pay taxes.   Is this correct?  Am I doing this right?  Or is this not allowed? 

[KrisD15]

Yes.

If there are other (non-qualifying education) expenses the student can allocate to the scholarship, such as room and board.  

So in other words, the student can claim some of the scholarship, but that needs to be connected to something relating to his education needs and support.

I'm not sure what the additional 9,000 paid, perhaps room and board? 

Is there enough to allocate to the student? 

Also, don't forget about other school expenses, such as books, supplies, perhaps a laptop. Box 1 only reports tuition and fees paid to the school. 

Yes, you may claim the portion of expenses towards a credit, the student claims the scholarship amount less the remaining QUALIFIED expenses. (Do not subtract out room and board expense from the reportable scholarship, only use those amounts as allocation so the student can claim the income.)

If necessary, the student files and claims that income. 

According to the IRS:

"You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. See the examples under Coordination with Pell grants and other scholarships in chapter 2 and chapter 3."

"If this situation applies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees."

IRS PUB 970

[Hal_Al]

delete duplicate

[Hal_Al]

Yes, you are doing it correctly and all of that is allowed. 

But the additional $500 to you, for claiming $4000 of tuition, instead of $2000, should be more than the tax the student has to pay (depending on whether he has other income). But, you are correct, going from $2000 to $4000 takes him from no tax to some tax. Using about $2800 of the tuition for the credit will get you more and still keep him at 0 tax (again, assuming he has no other income to report).

If your student paid for books and a required computer, those cost can be added to the $9057 as qualified expenses, reducing the amount of scholarship he has to declare as taxable.