Scholarship exceeds tuition: How to allocate it best? Can either of us take education credit?

[FrustratedMom]

Hi,

I would appreciate any advice on this; tried posting already but it didn't go through.

My daughter graduated last year and got a job.  She's filing her own taxes, but we are declaring her as a dependent for the year.  Her scholarship last year exceeded her qualified tuition and related expenses on Form 1098T by over $3000.  It covered not only tuition and educations expenses, but also a share of room and board.  In addition, she spent a few hundred dollars on books and other supplies. 

My questions are:

1) I understand that she must declare excess scholarship income, but there were some instructions saying that perhaps the scholarship could be allocated between tuition and room and board to be most advantageous.  How can we do that?  I can't figure it out from the instructions.

2) Can we, her parents, still take the AOTC?  Who takes it, and how do we figure out how much to take?

[Carl]

My daughter graduated last year and got a job.

By "last year" I assume you mean 2018. Since she had a job, if she has more than $4,100 of taxable income for the year, you need to be careful here. You may not meet all of the requirements to claim her as a dependent on your 2018 tax return.  To claim her as a dependent:

 - She must have been enrolled as a full time student for any one semester that started in the tax year for at least 5 months. If she graduated on May 1st, then you get to count the entire month of May.

 - She must *NOT* have provided more than 50% of her own support for the *entire* year. (Scholarships, grants, 529 funds, gifts from Aunt Mary do not count for the student providing their own support.)

- She must be *UNDER* the age of 24 on Dec 31 of the tax year.

Take special note that there is no requirement for the parents to provide any support. Not one penny. The support requirement is on the student. A concern here is that she may "in fact" have provided more than half of her own support for the entire year, if she got a job right after graduation.

Her scholarship last year exceeded her qualified tuition and related expenses on Form 1098T by over $3000.

Then there's no question that your daughter will report all education expenses on her own tax return. The excess scholarship money not used for qualified education expenses will be taxable income to your daughter. She will pay taxes on the excess - not you.

It covered not only tuition and educations expenses, but also a share of room and board. In addition, she spent a few hundred dollars on books and other supplies.

Scholarships can only be used for the qualified education expenses of tuition, lab fees and books. That's it. Any scholarship money used for anyting else, including room & board is taxable income to the student.

Now grants are different. The rules on what a grant can be used for are the same as for a scholarship, unless specifically and explicitly stated otherwise in the grant award letter. So grant money can be used for room and board if the aware letter specifically and explicitly states that category as one the money is intended for.

1) I understand that she must declare excess scholarship income, but there were some instructions saying that perhaps the scholarship could be allocated between tuition and room and board to be most advantageous. How can we do that? I can't figure it out from the instructions.

Only 529 funds and grants specifically designated in the award letter for room & board can be used for room and board. So if there are no 529 funds involved and you don't have a grant letter authorizing it's use for R&B, this is a moot point.

Hey @Critter did I miss something here on the work-around for the AOTC? Please jump in if so.

2) Can we, her parents, still take the AOTC? Who takes it, and how do we figure out how much to take?

If she qualifies to be claimed as your dependent and you actually claim her as your dependent, then you can claim the AOTC provided it has not already been claimed in the four previous calendar years. Remember, schools work in academic years while the IRS works in calendar years. So the reality is, it takes you five calendar years to get that four year degree. If she graduated in 2018, then that was most likely her 5th calendar year. If the AOTC was already claimed in the previous 4 calendar years, you can't claim it again.

However, the Lifetime Learning Credit can be claimed.

If you do not claim your daughter as a dependent, then you can not claim the AOTC or LLC. In such a case, your daughter can claim the one she qualifies for, provided she is not claimed as a dependent on anyone else's tax return.

Finally, please wait for @Critter to see if he jumps in here. He knows something about a loophole for the AOTC that I don't. It may or may not apply to you. Basically, if the AOTC has already been claimed in each of her first four years of college, then you can forget it because it can't be claimed again.

[Hal_Al]

 There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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 2. 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.

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 2. 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. 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 you enter the 1098-T on the student's return or $4000 more in the box 5 amount.

[pm4040]

Hi,

Would you please tell me how to do it for my situation? I'm the student filling married jointly. I have 12k in box 5 and 4k is in box 1. Our income 45k - from my husband’s job. I would like to claim educational credits if possible, all examples are for parents claiming their kids 1098-t. TIA

[Vanessa A]

To enter your 1098-T click the following:

• Federal
• Deductions and Credits
• Show More next to Education
• Start next to Expenses and Scholarships

TurboTax will calculate your education credits as you walk through the education section and answer your questions.

Does your scholarship exceed your expenses?  If so, the excess becomes taxable income. As you continue through the questions, TurboTax will calculate the portion of your scholarship that is taxable.

There is nothing special you need to do since you are married filing a joint return.  You will simply walk through, enter your 1098-T and answer the rest of the education questions. 

[pm4040]

Hi, so I don't have to do the "loophole" or change the amounts on the 1098-t? I did enter it that way and I couldn't claim the education credit.

[RaifH]

You can take advantage of the loophole @Hal_Al mentions if you meet a few criteria:

1. Your scholarship does not specifically state that the scholarship must be used for your tuition.
2. You had $12,000 worth of other expenses like room and board, books, supplies, and equipment on which you spent the $12,000.

If that is the case, you may still be eligible for an Education Credit if you follow these steps. However, depending on which Education Credit you qualify for, this may not help you and may even increase your taxes. Please use these steps rather than the ones previously mentioned which were for a prior year:

1. In the Federal > Deductions & Credits section of your return, scroll down to Education and click Show more. 
2. Click Start/Revisit next to Expenses and Scholarships (1098-T).
3. Enter your 1098-T. Under Your Education Expenses Summary, click Edit
4. Click Edit next to Scholarships/Grants (for all schools)
5. The first screen should be correct based on your 1098-T. Click Continue.
6. Answer Did your Aid Include Amounts Not Awarded for 2021 Expenses?
7. If you used your scholarship for anything besides your tuition, answer Yes and then put in how much of the $12,000 you spent on these other expenses.

You will not get an Education Credit unless you paid for tuition out-of-pocket, which means your scholarship would have to have been used on other expenses. If you enter $12,000 for the amount under the question Did you Pay for Room and Board with a Scholarship or Grant? it could have several impacts on your tax return and it may not benefit you personally. Also, please note that you can not do this if your scholarship specifically states that it is for tuition or if the scholarship is paid directly to the institution for tuition and you are just credited with the remainder.

@pm4040

[Hal_Al]

@pm4040 

Enter your 1098-T.  You will eventually reach a screen "Did (your name) pay for room and board with a scholarship or grant".  Answer yes.  That'll get you a drop box "How much of the scholarship was used for this expense".  Enter the whole $12K.  That will make the $4000 qualified for the ed credit and tax the $12K as income.

[LELM]

Hello,

I have similar situation where my student dependent son has scholarship more than his tuition expenses. Please advise if I do it correctly or if I need doing differently to get some tax credit.

My son is full time student. On his from 1098-T, total scholarship $14,000, total tuition pay to his school $13000.  He also made some income on W-2=$14,500. 

I file separate income tax for him w/o reporting that amount listed on 1098-T because that extra $1000 of scholarship , of course he uses on his other school expense like room and board. The rest of R&B expenses are covered by my 529 fund which he is the beneficiary.  He did not get any tax credit. He only got refund for the federal tax overpaid on his W2.

I file my income tax return as married join (with my husband), my son is claimed as dependent. I did not report any 529 fund distribution because total distribution = total spent on my son's R&B.  I did not include any of my son's W2 wage nor his 1098-T information on my filing. My total AGI is $195K. We did not get any education tax credit nor AMOC.

Should I do our tax filings differently to get some advantage of tax credit on education?

[Hal_Al]

@LELM 

Q. Should I do our tax filings differently to get some advantage of tax credit on education?

A. No.  Yours is right. His may need to be done differently, but to pay more tax, not get a tax break.

You did your tax return correctly.  The 1099-Q does not  need to be reported, as the distribution was covered by qualified expenses (room & board). You do not qualify for a education credit (income too high) so you do not enter the 1098-T, on your return.

While room & board (R&B) are qualified expenses for a 529 plan distribution, R&B are not qualified for  tax free scholarship (or a tuition credit). So,  $1000 of the scholarship may have to  be reported as income on the student's return. However if "other school expense" include  book and computer expenses, or fees not shown in box 1 of the 1098-T, he may reduce the $1000 by those costs. 

[LELM]

@Hal_Al, many thanks.

[ccdow601]

Hello @Hal_Al 

I have a similar situation and want to clarify these specific details. I have not quite wrapped my head around the AOC calculations.

Our son is in his 4th year of college and will graduate this year, we have claimed the AOC in 1 year. In 2021 he worked at his college (he was not a student but was away) Jan-Aug 2021, came home in May, and went to school Aug-Dec 2021. He earned W-2 income $11K. His 1098-T shows $35,961 in Box 5 and $31,331 in Box 1. Give the above info, I claimed him as a dependent on our joint return. We have too much income for the AOC; I deleted the 1098-T info from our return and added the 1098-T info to his return in TTax; I can see the approx $4000 earned scholarship income on line 1 of the 1040.  He checked the boxes "someone else can claim me on their return" and "they have claimed me". He is not getting the AOC.

Is there a way for him to get an AOC credit given the above info if we do our taxes differently (don't claim him?), and if so, which info would we/he need to enter/change on our tax returns?

He earned his W2 and earned scholarship income in CT (we live in GA). The TTax questions about earning income in another state takes his return thru a CT and GA tax return. Does he need to file a tax return in CT, and if no, how do I answer TTax so it does not generate a CT tax return?

Do I also need to pay attention to the adjustment from a prior year amount in Box 4 $23,386 of the 1098-T? I looked at our 2020 1098-T which showed Box 1 $32,357 and Box 5 $24,732; we did not qualify for the AOC last year based on our income (though I wonder if we could have with the loophole calculations, I can't seem to wrap my head around them yet) ; I checked out our school statements and can't figure out why this adjustment occurs and wondered if it will affect our 2020 taxes.

Thank you!

[Hal_Al]

Q. I have not quite wrapped my head around the AOC calculations.

A. There are no AOC calculations. Neither the student or the parent is eligible. 

Q.  Is there a way for him to get an AOC credit given the above info if we do our taxes differently (don't claim him?)

A.  No. He is ineligible for the refundable portion of the AOC. There is a scenario where you forgo his $500 Other dependent credit  to allow him to claim the non-refundable credit, but with $15K of income that's only worth about $250 to him.  

Q. Does he need to file a tax return in CT?

A.  Yes, if his total income (from all sources) is more than $15K.   GA will give you a credit, or partial credit, for any tax you pay to CT. https://portal.ct.gov/DRS/Individuals/Individual-Tax-Page/Nonresidents-wCT-Source-Inc

Q. If CT is not required, , how do I answer TTax so it does not generate a CT tax return?

A.  When asked if he had income in another state, answer No, to keep TT from generating the extra state.

Q. Do I also need to pay  attention to the adjustment from a prior year amount in Box 4 $23,386 of the 1098-T?

A.  Probably not. But you can only figure that out from your own records.  It usually does not affect you current year tax return.

https://ttlc.intuit.com/community/after-you-file/discussion/on-my-1098-t-form-it-only-has-box-4-fill....

[JillS56]

No, your son is not getting a credit for the AOC.   Since the scholarships in Box 5 of the 1098-T is more than the total tuition in Box 1, it creates an income situation, and the amount of income of $4,630 has been added to Line 1 of his 1040. 

No there is no way for him to get an AOC credit given the above info you have provided.   It doe snot matter if you make changes to your taxes and file differently (don't claim him?).   There is no credit available since he received more in scholarships than his total tuition.   That is why he has the $4,630 showing up as income.

If he is going to school in CT, he should not have to file a state return for CT.   If he worked in CT and withholding taxes were taken out of his for CT, he may want to file to get the amount of withholding taxes back.   If he does file in CT, he files as a non-resident.   This is true as long has he has not change his state of residence (did not get a driver's license in CT).  To delete the CT return, go into the State section and answer the questions until you get to the screen where it lists the states where taxes are being filed.   Just click on the "trash bin" symbol next to CT return.   This will delete the CT return.

The amount in Box 4 has to do with him withdrawing from classes for the Spring semester.   

Adjustments Made For a Prior Year
Box 4 of Form 1098-T reports adjustments made to qualified tuition and related expenses reported on a prior year Form 1098-T in Box 1. The amount reported in Box 4 represents a reduction in tuition paid during a prior calendar year. For example, if you paid Spring semester classes in December and withdrew from classes in January which resulted in a refund, Box 4 reports the decrease in paid tuition due to the withdrawal. The amount reported in Box 4 for adjustments to qualified tuition and related expenses may reduce any allowable education credit you may claim for the prior year. See IRS Form 8863 or IRS Publication 970 for more information.

In summary, if you claim your son as a dependent on your return, he cannot receive the education credit.   Based on the information provided, your son is not entitled to an education credit for 2021.   Sine your son received more scholarship fund in Box 5 than the total cost of tuition in Box 1, creates an an income situation for him.   Even if you were to change the way you file, your son will not receive the credit.   As for the Box 4 information, this has to do with him withdrawing from classes for the Spring Semester.  If you did not claim the education credit in 2020, then there is nothing that you have to do.

[ccdow601]

Thank you! I've read a lot of your posts and appreciate your expertise @Hal_Al