Excess Scholarship and AOTC

[sonofdod]

Sorry, I posted this earlier and wasn't able to follow the response. I read someone in a similar but not identical situation and they posted like I am doing now and I was better able to follow that response.  Please provide step by step; sorry not picking this up better.

The numbers:

$11,346 Payments to schools for qualified expenses

+ 1,078 Books purchased outside the school for classes

$12,424 Total qualified expenses paid

- 4,000 AOTC

$8,424

- 13,750 Scholarships not restricted to tuition

$ -5,326 What the child will end up claiming as taxable scholarship income

There were distributions from the child's ESA for Room & Board totaling $15,157 with $2,800 of that being paid directly to the student (the rest paid directly to the school).

Parent using TT Home and Biz desktop (Mac) and child using TT online and already filed (assume they will need to amend).

What is the process to be followed in both parent and child return (amendment)? A 1098-T was not provided but university says they will upon request. I don’t see an option in TT Home and Biz to say I qualify for an exception. Does this mean I have to request a 1098-T from the university?

Does it matter that I haven't located any info stating the scholarships must be used for tuition?

Thanks.

[KrisD15]

You do not necessarily need a 1098-T if the school did not send you one as long as you have the school's Federal Employer Identification Number (EIN). 

Be sure you have school account records showing the charges and payments. Keep this with your tax file. Make sure you are only using/claiming expenses PAID in 2021 for expenses incurred in 2021 and/or the first 3 months of 2022 only. Also make sure the scholarships are not restricted to be used for a particular expense. 

I am not clear about the distribution. I am assuming the 1099-Q was issued to the student and the total, including the 2,800 that went to the student, was used for education expenses. 

The 1098-T is for computing the credit, since you already know what you want to claim, you COULD enter the "mock" 1098-T with the 4,000 in Box 1 into your TurboTax program. Finish the Education interview as if the 4,000 was the only expense and there were no scholarships and/or financial aid. Done. You should get the American Opportunity Tax Credit if all other requirements are met. 

The student enters the 5,326 as income on their 1040 line 1. 

STUDENT:

Sign into TurboTax and continue through until you can start selecting "Wages & Income" located at the top of the screen

Click on Wages & Income

(If the program asks about your W2, select Skip for now or enter any W2 you may have )

Select answers to the following questions if necessary to move forward 

Click Add more income 

Scroll down to the VERY LAST option "Less Common Income" and click Show more

On this new drop-down list scroll down to the VERY LAST option "Miscellaneous Income" and click START 

On this new drop-down list scroll to the VERY FIRST option "Other income not already reported on a Form W-2 or Form 1099"

Click START

Select YES to the page titled "Other Wages Received" and Continue

Select CONTINUE on the "Wages earned as a Household Employee" screen (enter nothing here)

Select CONTINUE on the "Sick or Disability Pay" screen (enter nothing here)

Select "Yes" on the "Any Other Earned Income" screen and continue

Select "Other" on the "Enter Source of Other Earned Income" and Continue

In Description Box type "SCH" and the amount

Click Done 

 This will put the income on the 1040 line 1 where it needs to be.

The 1099-Q needn't be entered on any return if the total distribution was used for education expenses, including room and board. 

If there is taxable income from the 1099-Q, you can enter the 1099-Q on the student's return. Also enter how much was used for education expenses and that the student received a scholarship. The earning portion of the distribution not used for education will be taxed, but the penalty tax will be waived because of the scholarship. 

According to the IRS:

"If you file Form 1040 or 1040-SR, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1."

IRS PUB 970 has some other examples of how the credits can work. 

IRS PUB 970

[sonofdod]

Thanks for this info.

I think I'm with you on the student entering $5,326 because the parent is entering $1,078 for books next to "Books and materials not required to be purchased from the school" - correct?  The parents education summary now shows $5,078 for expenses and scholarships on the deductions and credits page.  Or, do I have this wrong and the child is entering $1,078 for books and, if so, where?  Or is nobody entering the $1,078 for books?

$13,750 scholarship - $12,424 tuition and books = $5,326 on the child return as income

Is it a problem that the child already filed and did not include this income?  The child apparently cannot amend until some time in March.  I suppose the parent should wait to file after the child amends?

[Hal_Al]

You have one main issue (can you claim $4000 of expenses for the AOTC)  and numerous insignificant side issues.

Q. Can you claim $4000 of expenses for the AOTC?

A. Yes, your math is correct.  @KrisD15  has explained the simple (and correct) way to do that. "Enter the 'mock' 1098-T with the 4,000 in Box 1 into your TurboTax program. Finish the Education interview as if the 4,000 was the only expense and there were no scholarships and/or financial aid.

Go ahead and file you tax return without regard to any of the side issues. They don't affect your filing.

_______________________________________________________________________________________

Side issues:

1. You don't need a 1098-Tto file.   But, it would be nice to have it for your files.  Since the school is willing to give you one (that's unusual), go ahead and get one.

2. Your daughter's amended return.  As explained at your other post*, an amended return  is technically not required because her total income ($6125 wages + $5326 taxable scholarship) is less than the filing requirement ($12,550).  You can file, and claim the AOTC, whether she amends or not.

3. You may totally disregard the 1099-Q since there is sufficient room and board to cover the distribution (although the "$2,800 of that being paid directly to the student" is a little iffy).  But that doesn't affect your return. 

4. "Does it matter that I haven't located any info stating the scholarships must be used for tuition"? No. just the opposite. Unless you know otherwise, you may assume the scholarship  doe not have to be allocated to qualified expenses.

5. Is it a problem that the child already filed and did not include this income?  No and yes. No, you can still file your return without it.  Yes, it would be nice if her return agreed with what you are claiming, but it is not necessary if your records are good (in the unlikely event you/she are audited)

6.   I suppose the parent should wait to file after the child amends? No, it's not necessary. She can amend anytime. IRS matching doesn't come until much later, and probably not at all.

7. Who enters the book expense?  Or is nobody entering the $1,078 for books? Nobody, because you're both using a workaround (just entering $4000 total qualifying expense in your case and just entering the taxable amount in her case).

8. Should the student enter the taxable scholarship in the educational expense/scholarships section of TT or the "Less Common Income" section?  Both get the correct result on the student return. But I think it is better if  taxable scholarship is entered in the education section, rather than the other income section, as that gets TT to place the SCH5326 notation on the dotted line next to line 1 of the 1040. 

*https://ttlc.intuit.com/community/college-education/discussion/tuition-tax-credit-with-a-scholarship...