Scholarship and 1098-T

[ViS]

Sorry for the confusion.

Here are the numbers :

Box 1-16,400

Box 5-19,200

Additional qualified expenses-$1200.

From what I understand-my daughter should report $1600 and taxable income. But if she reports $2000, it gives us  a little bit of AOTC. I was under assumption that she literally can put any amount as taxable income from her scholarship. Am I wrong?

Thank you

[NCperson · Accepted solution]

google IRS publication 970 and look at the chart on page 13.  

the 2nd to the last box asks "Were the same expenses paid entirely with a tax-free scholarship, grant, or employer-provided educational assistance?" if the answer is yes, you'll note the chart takes you to "you can't claim AOTC"

so whatever expenses (Box 1 and other related fees such as the $1200 you note)  are paid for by the scholarship are not eligible for AOTC.  And since Box 5 exceeds Box 1 plus the $1200,  there is no AOTC benefit. 

her reportable income is $1600.  Remember, that scholarship is already a benefit (you are not asked to pay tax on that income as long as it was used for qualified college expenses) and the federal government isn't in the practice of letting citizens take two benefits for the price of one. 

You just can't "willy nilly" move the scholarship dollars around to create an AOTC benefit.   I know there are threads suggesting there is a workaround, but I have not seem anyone explain how to legally circumvent the requirements of the chart I note above.

[Hal_Al]

Yes, your daughter has $1600 of taxable income. 

I'm not sure why you selected $2000 as the alternate amount for the AOTC.  The amount to report is $3600 (1600 + 2000) for a $2000 AOTC or $5600 (1600 + 4000) for the max $2500 AOTC. 

You should go for the max, as your daughter should owe no tax, considering her $3000 other income. 

This is not some sinister scheme. From the 2018 form 1040 instructions (pg 100): “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040, line 17c, and IRS.gov/EdCredit".

[ViS]

I totally understand and agree with your statement.  There were other statements about "loophole" , that what confused me. But your explanation confirms my doubts about the loop hole. Thank you very much for your help.

[NCperson]

@Hal_Al - that statement says you MAY; it doesn't say you CAN.  And it never mentions AOTC in the statement specifically.

do note that on the RIGHT side of page 14 of publication 970 it states under the AOTC section: 

you can't  "Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer."  isn't that exactly what you suggest? 

Can you please point to the specific reference in publication 970 that lays out how you MAY do it.  I've already provided the documentation from the same publication where the IRS says you CAN'T. 

However, under the lifetime learning section, beginning on page 22,  it does state on page 28 that there is coordination available with Pell grants and other scholarships to increase the lifetime learning credit, but it references lifetime learning credit and there is no mention of AOTC. 

Is it possible your "loophole" is not a loophole at all but simply permissible under the lifetime learning credit, and simply not permitted under AOTC?

[Hal_Al]

@NCperson  - Thanks for making me look.  I didn't realize that this loop hole technique is described in detail (including limitations) on page 16 of PUB 970, and is specific to the AOTC.  I think this section of Pub 970 may even be new, this year. 

Page 15 (AOTC section) PUB 970 (repeated on pages Page 5, 27 & 41) :

*TIP* "You may be able to increase the combined value
of an education credit if the student includes
some or all of a scholarship or fellowship grant in
income in the year it is received. For examples, see Coordination with Pell grants and other scholarships., later." Details on page 16. 

I was where you are, 5 years ago, when a user (not a expert or Champ) here, in the forum,  first called me out for telling people they couldn't do it.  I couldn't believe the government would be that stupid!  

[NCperson]

thanks for finding that.... I searched the 970 the first time and did not see that exception that deep in the examples. it was called out clearly under the learning credit. 

there are limitations.... the way I read it 

• the amount of the scholarship to be moved to income can't cause qualified tuition plus related fees minus  the remaining scholarship to exceed $4000. (which becomes important with a 529 interplay)
• the scholarship itself must permit the use of the dollars to cover expenses outside qualified tuition plus related fees (e.g. Room and Board).  If the scholarship terms require the money only to be used on tuition plus related fees, you can't do it. 

example:

Box 1 = $5000

Box 5 = $7000 - two scholarships one of which is $4000 and is limited to qualified tuition and related fees. (I don't know how frequently scholarships limit their use to qualified or non-qualified expenses)

Student's income is $2000 (from the net of Box 1 and Box 5).  Student and Parent want to increase the scholarship income by $6000 so that Box 5 becomes $1000, and the net is $4000 which is the maximum benefit for AOTC. 

However, that is not permitted because one of the scholarships ($4000) is to be used exclusively for tuition and related fees.   The best the student can do is move $3000 into income and reduce Box 5 by a similar amount to $4000

Box 1 remains at $5000 and Box 5 is $4000, leaving $1000 available for AOTC. 

Box 5 can't be any less than $4000 because one scholarship can only be used for tuition and related fees.

thoughts?

[Hal_Al]

I have been aware of that restriction and do include it in my standard "loophole post".

[NCperson]

suggest not calling it a 'loophole' - that has a very different connotation.... normally that's  an unintended consequence of a law / rule / regulation that wasn't considered.  This was considered (just had to find it deep in the examples) .  that is what threw me. 

[ViS]

@NCperson  @Hal_Al , thank you for all this information. So how would I find out how much of her scholarship had that "condition/rule"?  Also, if you report more than $2200 in additional income-it has to be reported on "kiddie taxes" form. So you end up paying taxes for that portion. Right?

[NCperson]

it is considered 'earned income' - not 'unearned income' 

[Hal_Al]

Q. How would I find out how much of her scholarship had that "condition/rule"?

A.  Most scholarships do not have that rule, so the simple answer is: if you don't know that it does have that restriction, it doesn't.   

Q. Additional income-it has to be reported on "kiddie taxes" form. So do you end up paying taxes for the portion above $2200. 

A.  No. Scholarship's income classification is convoluted.  It is is unearned income for purposes of the kiddie tax, but earned income for purposes of calculating the standard deduction.  So, as long as the student's total income is less than $12,200, he/she will not pay any income tax. 

TurboTax handles this well, if you get the scholarship income on line 1 of form 1040.  That's why it's important to enter scholarship income in the deductions and credits/educational expenses section and not in the income section.

[ViS]

I am sorry, I am still a little bit confused.  So, is my daughter  allowed to claim any part of the scholarship as  her income or not, knowing that ALL of her school related/qualified expenses were paid by scholarship? She  did not have any unqualified expenses (no room and board) and even got a refund from school.  

The only thing I can think of as unqualified expenses is her study trip abroad for 2 weeks (approx. 4K), the bill from school was for a transportation and living/program expenses, that partially was paid from scholarship and partially cash.

Thanks

[Hal_Al]

The thread has gotten too long.  I thought that had been answered above. You'll need to repeat all your numbers in one post. Trip expenses, even if part of the academic program, are not qualified expenses.  So any scholarship that paid for the trip would be also taxable.

Total scholarships less qualified expenses plus the amount used to claim the tuition credit = taxable amount.

[ViS]

Confusion is coming from 2  answers with different opinions. 

Here are the numbers :

Box 1-16,400

Box 5-19,200

Additional qualified expenses-$1200.

Disregard the trip since it is not qualified expense. 

Put it in simple question-since ALL of her school expenses paid by scholarship, would it be allowed for her to claim any amount as taxable income in order for us to get AOTC?

I looked through Publication 970, but didn't find anything about scholarship being higher than all the expenses.