How do I use loophole for Scholarships to get best AOC?

[CindyKR]

Our Dependent Full-Time College Student received a 1098T.
Box 1 $10,075.90
Box 5 $16,500

The Room and Board for 2020 was $8735 according to the college's statements for Spring and Fall, so I think we should be able to use at least that amount to shift some of the qualified expenses to our child's tax return in order for us to claim the American Opportunity Credit.

However, that is not how the 1098-T shows the charges and payments. They do not include the Spring 2020 charges or our personal check sent in late Dec 2019 for 2020 because they apparently included it in the 2019 1098-T (which I did not realize until just now while inspecting this 1098-T for a very long time trying to understand it.)
And, the school included the Spring 2021 qualified charges on this 2020 1098-T.
But, they included the scholarships for Spring 2020 and Fall 2020 and the amount we paid for Fall 2020 and Spring 2021.
Does it matter which year you pay the costs in? 
How would I calculate this mess of different years in order to qualify for the AOC?

I figured it doesn't matter when we paid when considering the scholarship money, so I am thinking that we can use the $8735 room and board listed on the statements for Spring and Fall 2020 as opposed to what is on the 1098-T because room and board is not included on the 1098-T, only the qualified expenses are on there.
Is that okay?

And, I'm wondering if I can shift even more expenses than room and board to get a bigger credit. Do we have to prove other expenses in some way? What can we count as non-qualified expenses to help us increase the AOC?

Also, when I was testing this, I entered a round $10,000 in my child's tax return as scholarship income. But, the dependent child's standard deduction seems to cover it entirely and their return shows they owe no taxes at all. Can that be correct?

Meanwhile, our parent return went from $0 AOC to $2434 for AOC after testing it with $10,000 instead of the just the 2020 room and board of $8735. I know the maximum AOC is $2500, so I'm wondering if we are allowed to count more than the room and board, and, if so, what else we can count?

Also, 2020 will be the 3rd tax year for trying to qualify for AOC. So, we will have either 2021 or 2022 to qualify again. I expect our child's scholarship to increase by $1,000 in the 2021-2022 school year, but the room and board will decrease because they are moving off campus and we think it will be significantly cheaper. How can we decide which year would be better to try to get the AOC?

Also, I thought we could get only either the AOC or the LLC. But, I saw another post where the expert was saying you could do 4 years of AOC and use the LLC in the year of graduation or flip-flop it. Is this true? 

One other thing about entry of this loophole: In our parent return, I entered the 1098-T information as it is on the form. Then, when I got to the place in the interview where it asked, "Did Child Pay for Room and Board with a Scholarship or Grant?" I answered yes, and entered the temporary $10,000 in the box that said Total used. That seemed to work and flow to Form 8863 properly and then to Schedule 3 and the 1040. Does that all seem correct?

In my child's return, I went to the Education Deduction, Clicked on Expenses and Scholarships, entered the 1098-T as it is on the form, clicked on Scholarships/Grans Edit, then was confused because it asked if some of the scholarship was not for 2020 expenses. But, I didn't notice the last few years, so I'm not sure what to do now. I said yes, and entered $8,500.

Then, it asked if we paid room and board with the scholarship. I answered yes, and said that out of the $16,500 my child received in scholarships , $10,000 was used to pay for room, board, or equipment, etc expenses. Is this all okay?

If that is all the correct method to enter the loophole changes correctly, I just need to understand the specifics of which year's room and board to enter and what other expenses I can count. I know my child bought some books and a computer (or two? - they keeps trying to upgrade on the cheap). But, I know the computer was bought second-hand with cash off Facebook Marketplace - no receipt. Can that be counted? One was also stolen, but I'm sure that doesn't matter here.

And, finally, if I've messed up the scholarships against the expenses, do I have to go back and amend my other tax returns? This is all such a nightmare!!! 

[Hal_Al]

Forget room and board.  R&B is not a qualified expense for either the AOC or for scholarships to be tax free.  

R&B are qualified expenses for a 529 distribution, but you did not mention having one of those.

 The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return.  You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T.  Enter your amount as you know them to be.

[CindyKR]

Hal_Al

Thanks for responding. I guess I am much more confused than I thought. Could you please clarify the following?

Q1: I think I didn't make myself clear. I don't mean that R&B are qualified expenses. I mean that they are non-qualified. So, I thought we could use the R&B amount that was charged (or paid -not sure which) in 2020 in order to determine how much scholarship money we can have our child claim as taxable income, and then deduct that from the scholarship money on the parent tax return so there are more qualified expenses for us to pay. Is that the correct way to look at it? 

Q2: In Dec 2019, we paid what was left after scholarships were considered for the Spring 2020 semester., but the scholarships were applied in Jan 2020. In Dec 2020, we paid what was left after the anticipated scholarships for Spring 2021, but the scholarships were applied in Jan 2021. I am now assuming it is like cash basis accounting where we only count what was actually done in the same year. Do we you use qualified expenses paid IN 2020 or billed FOR 2020 to determine eligible expenses for an AOC? 

Q3: Can we count an expense for a used computer in 2020 if our child had virtual classes, but does not have a receipt?

Q4: My child received Covid Relief from the college. Does this get deducted from our qualified expenses?

Q5: Normally, my child would be without a vehicle at college and I would go get them during breaks. But, since we could not let them come home due to the virus, we had to let them take our vehicle so they could move in and out of housing with their belongings, go someplace over breaks and summer and live elsewhere. Would any of the vehicle expenses, parking tags, summer food, etc, count as qualified expenses?

I'm exhausted staying up all night trying to figure this stuff out. Thanks for your patience. 

[Hal_Al · Accepted solution]

Q1: Parents need  to determine how much scholarship money we can have our child claim as taxable income, and then deduct that from the scholarship money on the parent tax return so there are more qualified expenses for us to pay. Is that the correct way to look at it? 

A1. Yes, basically.  But, it is not necessary to allocate any of the scholarship to room & board or any other specific expense.  Just say it's taxable. To make some of the scholarship taxable (re-allocate some of the expenses), you   To do that in TT, usually (there are other workarounds) must tell TT how much you want taxable by saying it was used for room &board. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B. 

Q2:  Do we you use qualified expenses paid IN 2020 or billed FOR 2020 to determine eligible expenses for an AOC? 

A2.  You count what you actually paid in that year. So, you cannot count what you paid in 2019 for 2020. You can count what you paid in 2020 for 20212.  The scholarships, however, are allocated to the year of the expenses, regardless of what the 1098-T says.  You will reach a screen, in TT,  that allows you to adjust the scholarship amount for "amounts not awarded for 2020 expenses".

Q3: Can we count an expense for a used computer in 2020 if our child had virtual classes, but does not have a receipt?

A3. Yes if you paid for it in 2020. Not having a receipt is only a problem if audited.

Q4: My child received Covid Relief from the college. Does this get deducted from our qualified expenses?

A4.  No. That's tax free money, like the stimulus you got, and is not designated for college expenses , per se.

Q5:  Would any of the vehicle expenses, parking tags, summer food, etc, count as qualified expenses?

A5.  No.  Nothing in the covid laws changed how transportation expenses are handle.  They're still not qualified expenses.

[CindyKR]

Hal_Al

Okay, I am understanding more, I think. As for the Covid Funds, though, I found the following on page 2 of pub 970:

"What's New for 2020 Emergency Financial Aid Grants under the CARES Act. Emergency financial aid grants under the CARES Act for unexpected expenses, unmet financial need, or expenses related to the disruption of campus operations on account of the COVID-19 pandemic, are not includible in your gross income. Because the grant is not includible in your gross income, you cannot claim any deduction or credit for expenses paid with the grant including the tuition and fees deduction, the American opportunity credit, or the lifetime learning credit. See FAQs: Higher Education Emergency Relief Fund and Emergency Financial Aid Grants under the CARES Act."

So, back to Q4,

Q4: My child received Covid Relief from the college. Does this get deducted from our qualified expenses?

A4.  No. That's tax free money, like the stimulus you got, and is not designated for college expenses , per se.

I understand it is "free" money, but it looks like we have to use it for food and housing and medical because that is what was used when asking for the funds and how the school determined how much to give. Other students got more because they said they needed it for tuition, books, and fees, but since our child had so much scholarship money to cover those things, our child didn't ask for that. So, since we didn't actually "pay" for those things due to the relief funds, don't those covid funds reduce how much of the scholarship we can then shift to the student in order to have more qualified expenses of tuition and fees for the AOC?

[Hal_Al]

"you cannot claim any deduction or credit for expenses paid with the grant" (2020 Emergency Financial Aid Grants)........................" it looks like we have to use it for food and housing and medical because that is what was used when asking for the funds"

Q. So, since we didn't actually "pay" for those things due to the relief funds, don't those covid funds reduce how much of the scholarship we can then shift to the student in order to have more qualified expenses of tuition and fees for the AOC?

A.  No. As  answered above: Note the wording at that screen “or other expenses”.  Other expenses include clothing, transportation, entertainment, etc. You can even put the scholarship money in a savings account. 

[SNOLES6171]

Hello

I need your help entering 1098T information.  It told me on smart check to correct the error.

I would appreciate your help ASAP been trying to correct this for 45 minutes

[SNOLES6171]

please reply

[Hal_Al]

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