Room and Board / Educational Expenses / AOTC

[npkressen]

Doing daughter (non-dependent) 2023 tax return.  There is no 1098T b/c tuition for final Spg, 2023 term was paid in 2022. She had $6400 R&B and $88 books/supplies costs, which were paid with 529 Plan distributions. She wants to take advantage of AOTC -- which SHOULD produce a $1000 benefit (the refundable portion of AOTC) b/c her income is low enough to not have any income taxes due -- even with inputting $4000 as "excess distributions from 529" ($2700 of which is from Earnings, and thus taxable) in order to get the AOTC to be generated.

The issue is that we cannot get the $6400 R&B to show up as a qualifying ed expense (it SHOULD BE, since it was paid out of the 529 Plan distribution, right?).  We have looked over the "Student Info Worksheet" tables and Form 8863... and cannot figure this out.  TT produces an AOTC (refundable credit) of just $35 -- related to just the books/supplies costs...

Please advise if you have a way to get the R&B expenses to show as counting toward the AOTC calculations?...

Thank you.

[Hal_Al]

Q. The issue is that we cannot get the $6400 R&B to show up as a qualifying ed expense for the AOTC. It SHOULD BE, since it was paid out of the 529 Plan distribution, right?

A. No. That's a misinterpretation of the rules. All that means is that room and board  are qualifying expenses for the 529 distribution not to get taxed.  R&B is never a qualifying expense for the AOTC. 

Q.  TT produces an AOTC (refundable credit) of just $35 -- related to just the books/supplies costs. Is that right?

A. Yes. 40% of $88. 

And she may not be eligible for that. If spring 2023 is her final term, that usually means it's her 5th calendar year in school. If you, as the parent of a student-dependent, already claimed the AOTC the max 4 times in the past, she is not allowed to claim it this year. 

If she does not have enough income to have a tax liability, why is she still not your dependent?

Can the student be claimed as a dependent in the Graduation year?

If he/she was a student (under 24) for at least 5 months and lived with you for more than half the year, and did not provide more than 1/2 his own support for the whole year, you can still claim him. Be sure he knows you're claiming him, so he doesn't claim himself. He can only be claimed once. But, he can "file taxes" without claiming his own exemption.

The real question is who should be claiming him in this "transition" year to adulthood. You two have to agree on who is going to claim his exemption. Each should do their taxes both ways and see which way the family comes out best.  Even then, you have to meet the rules. 

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test. Only a QC qualifies a taxpayer for the Earned Income Credit.

The rule is that a child of a taxpayer can still be a “Qualifying Child” dependent, regardless of his income, if:

1. he is a full-time student under 24 for at least 5 calendar months of the year (graduating in May usually means you meet the 5 month rule)
2. he did not provide more than 1/2 his own support  (scholarships are considered 3rd party support and not support provided by the student). 
3. lived with the parent (including time away at school) for more than half the year

So, it usually hinges on "Did he provide more than 1/2 his own support in 2022.

The support value of the home you provided is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants. IRS Publication 501 on page 20 has a worksheet that can be used to help with the support calculation. See: http://www.irs.gov/pub/irs-pdf/p501.pdf  (page 15)