American Opportunity Tax Credit

[JCoop125]

My daughter is 22, and is a full-time college student. She did not work in 2019, and she lives with me. My income is close to $35k. I am the only one who can claim her. She is not a grad student. She began college in 2017. After trying to enter the below information in Turbo Tax free edition, Turbo tax states that she is not eligible for the AOTC. I am confused as to why...

She has a 1098-T with the following figures:

• (box 1) $1775.00 in tuition payments to the College plus around $400.00 or so for books
• (box 5) $4,258.00 in scholarships
• Enrolled at least half-time
• Box 7 was checked in 2018

My questions:

• Would qualify for the AOTC?
• Would I be able to claim  the AOC on my return? If so, how?
• Would my daughter need to complete a return for the remaining amount in scholarship income of roughly $1,825.00?

Further issue:

When entering all of the above information in Turbo Tax free edition, I receive the following message:

"You can't claim an education tax break.

"Based on what you've entered so far you are not eligible for an education deduction or credit.

"Here is why you may not qualify:

• Scholarships, grants, and other tax free assistance exceed the education expenses
• There were no net qualified education expenses."

In 2018, she had scholarships that exceeded the amount of education expenses, and she did qualify. I can't figure out what's different for 2019.

Any insight that can be provided will be helpful. I appreciate your time in advance. Thanks, and have a great day!!

[Texas Roger]

If the entire amount of scholarships could have been used for living expenses, you can enter the entire amount of the scholarships as income on your daughters tax return. You can then claim the tuition and fees and other qualified expenses on your tax return for the American Opportunity Credit. What I can't tell you is exactly how to enter this on both of your tax returns using TurboTax. 

@Hal_Al  Hal_Al may know the details for how to enter it and explain it better than I did.

[Carl]

After trying to enter the below information in Turbo Tax free edition, Turbo tax states that she is not eligible for the AOTC. I am confused as to why...

Seeing that the 1098-T shows the scholarships received in 2019 are about 3 times more than the qualified education expenses paid, even when you include those qualified expenses not included in box 1, I just don't see anyone with any out of pocket expenses for *qualified* education expenses.

Now if the student wants to claim the scholarship income on the student's tax return and pay taxes on that income (which will be paid at the parent's tax rate if higher), by not claiming any education expenses, then the parent can claim the qualified education expenses as out of pocket expenses and qualify for the full AOTC (both refundable and non-refundable portion).

Weather the student will actually pay taxes on it though, will depend on the total of the student's reportable income. The student will be taxed on the lesser amount of

 - The amount that exceeds their standard deduction of $12,300 or

 - The amount that exceeds their earned income, plus $350.

[Hal_Al · Accepted solution]

You do not qualify because Scholarships, grants, and other tax free assistance exceed the education expenses.

But, as TeaxaRoger suggested, there is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit (AOTC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using your numbers as an example: Student has $4258 in box 5 of the 1098-T and $1775 in box 1, and $400 of other qualified expenses.  At first glance she has $2083  of taxable income and nobody can claim the American opportunity credit. But if she reports the full $4258 as income on her return, the parents can claim $2175 of qualified expenses on their return, for the AOTC. 

In actuality, she does not even  need to file, because her total income is less than the $12,200 filing requirement*.  Some experts, recommend that she file anyway,  to document that she  treated  the scholarship as taxable income.

You can both use the 1098-T to enter the expenses. If you claim the tuition credit, you do need to report that you got one (the TurboTax interview will handle this) Your student should use the 1098-T because it makes entering scholarship income go smoother.

You essentially should use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but leave box 5 blank.  Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. Be sure to enter the book cost at the book screen (or add it to box 1 as an expedient). 

On the student's return  enter $0 box 1  and $4258 in box 5.  Theoretically, the Turbotax interview can handle  entering actual numbers. But it gets tricky. The key being you should eventually reach a screen called "Amount used to calculate education deduction or credit". I recommend the work around. 

*For others reading this, the $12,200 filing requirement assumes the student only has earned income and/or scholarship income and not other kinds of income (including taxable 529 plan distributions).

[Hal_Al]

Although scholarship income is not technically earned income, and is subject to the "kiddie tax" (taxed at the parent's rate), it is treated as earned income for purposes of calculating a dependent's standard deduction (if the SCH income is properly entered on line 1 of form 1040). 

The standard deduction for 2019 is $12,200, rather than $12,300 and will be $12,400 for 2020. 

[JCoop125]

@Hal_Al Thank you so much! This was extremely helpful.