My son is freshmen in college, received $10500 in scholarship, but paid only $7000 for fall tuition, remaining paid Spring 2021. His W2 is $900. I will be including my son as a dependent, Can I (Parent) claim AOC $2500 ? Thanks.

[rks2]

Wondering if remaining $3500 can be shown as income in his W2 or reported 2021 tax year as scholarship.

[MaryK4]

Technically IF the scholarship is not specifically earmarked to pay the Spring 2021 tuition, you could make the $3500 scholarship income on his tax return.  If you are claiming him as dependent, you would be able to claim the American Opportunity Credit.

The education credits can be difficult because of the overlap with Fall and Spring semesters.  The most important thing is to keep all the records together to show what was charged and what was paid when.  

[Hal_Al]

Deleted

[rks2]

Thanks for your input. 

[rks2]

Thanks for your input.  I just realized the typo in my question, I meant to ask can I (parent) claim AOC, as I am claiming him as a dependent.

[Hal_Al · Accepted solution]

Q.  Can I (parent) claim AOC, as I am claiming him as a dependent.

A.  Yes, but he will have to declare more of his scholarship as being taxable.  

There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), 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 an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income. 

Your son will still not have enough income to have to file a tax return (less than $12,400).  Some advisors recommend that he file any way to document the declaration of income.

I'm of the opinion that the $3500 should be counted on the  2021 returns. In TT, you will reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2020 expenses".

To use the loop hole, 

You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Enter the 1098-T, exactly as received, on the student's return. Enter book expenses separately. Enter the $3500 In TT, at the screen "amounts not awarded for 2020 expenses". In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.  

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is  to enter $4000 less than the actual box 1  amount, when he enters the 1098-T

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount  in box 5. In that case be sure the amount in the  "Amount used to claim the tuition deduction or credit" box is 0.