Room and Board charges for scholarship income set off

[hackrader]

I received $6982 in total scholarship money between a Pell Grant and a $2500.00 academic scholarship, which stipulated that I may use it for anything I need after tuition and books are paid. If I used it to pay for room and board, can I put that $2500.00 into the section that asks," Tell us if you used part of the scholarship for room and board?" The wording seems contradictory on the question and makes it seem as if I cannot do it? It makes the difference in being able to claim the tax credit for the year.

[KrisD15]

Yes, you can enter it that way. 

If you used it for room and board

It CAN be applied to a 529 Plan distribution or become "Other Income" on your 1040.

It WILL NOT lower the available education expenses used for a credit

Example, if you have a 6,000 scholarship, 8,000 tuition and use the scholarship only for tuition, you would have no taxable income and 2,000 to apply towards a credit.

If you use 2,000 for room and board, you would have 2,000 taxable income and 4,000 to apply towards a credit.

If you took a 2,000 distribution from a 529 plan as well, you could claim 2,000 room and board which would be tax-free because of the distribution and still have 4,000 for a credit. 

IRS PUB 970

[Hal_Al]

Q.  Can I put that $2500.00 into the section that asks," Tell us if you used part of the scholarship for room and board?" 

A. No, not the whole $2500, since the scholarship is apparently restricted ("stipulated that I may use it for anything I need after tuition and books are paid). You may put the amount that was not used for tuition and books.

Q. It makes the difference in being able to claim the tax credit for the year.

A. Yes that is not unusual. See explanation below. 

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 f the conditions of the grant are that it be used to pay for qualified expenses (usually tuition).

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, instead of $6000.