Scholarships on child's 1098-T reflect both this years scholarship (fall 2019) and last years scholarship (sp 2019) and it's affecting my AOTC

[Anonymous]

My child's 1098-T reflect tuition for this fall ($7100), and both this years scholarship (fall 2019, $1623) and last years scholarship (sp 2019, $2486) for a total of $4109.  TT asks what part of the scholarship was not for 2019 expenses ($2486). Between my daughter and myself we paid $5500 ($2k cash, $3500 from her 529) for the fall 2019 semester, and yet TT says our qualified expenses (in order to claim the AOTC) are only $2500.  I've read on IRS Pub 970 that you can have the student claim some of the scholarship as income to bump up the qualified expenses for the AOTC.  So, if my daughter were to claim $1500 of the scholarship as income it should give me the full $4000 needed to maximize my AOTC.  Here's the wrinkle:  the 1098-T lists $2486 as Spring 2019 scholarships, and $1623 as fall 2019 scholarships.  She lived in the dorms last spring and could very conceivably  apply the full $2486 towards dorms.  She lives off campus this year, and I pay her rent separately from the school with her 529 account.  So if my daughter claimed $1500 as scholarships to pay for housing, would it not work since we are talking about 2 different school years?  TT phrases the 2 questions this way exactly "How much of the $4109 received in scholarships was not designated for 2019 expenses? - $2486."  Then it asks "Did you use any scholarship to pay room and board?"  I click yes, and TT asks "How much of the $4109 was used to pay for this expense?  - This is where I would put in $1500.  I don't know if doing this will trigger an audit because the $2486 is clearly being marked as last years (sp 2019) scholarship, meaning the $1500 would *seem* to be from the fall 2019 scholarship.  But this is impossible since she lives off campus this year, so the $1500 would have to have come from last spring's scholarship.  Assuming this is all ok to do (and honestly it should be as we paid more than $4k between my daughter and myself), where would she include the $1500 of income on her taxes?  I noticed under "Miscellaneous Income" there is a subcategory called "Other Reportable Income."  Should it go in here?  Over the summer she got a job consulting, so she HAS to file and pay taxes.  I think she would actually have to pay taxes on $1623 (atleast that's what TT is saying, even when I put $1500 was used for non-qualified expenses) so it may not even be worth the extra $400 I would get on my taxes.  Also, if I am marking the $2486 as being money not designated for 2019 expenses, do I need to file an amendment to my 2018 taxes? Thank you!

[AmyC · Accepted solution]

Your daughter can claim the extra scholarship as income on her tax return.

The program asks things in a manner to reduce problems as they transfer to your actual return. Your situation is the opposite. Take a look at form 8863. It isn't as complicated as the program is making it. There is no earmark between which funds and what portion on the IRS form 8863. The IRS only wants a top view. You got $X, $Y went to room and board, $z is being taxed and you claim AOTC.

You are clearly smart. Put the answers in so they work on the Form 8863

Here are some links for you:

Form 8863

Qualified Expenses

Qualified College

Available Education Credits

IRS Q & A about education credits

Tax Benefits for Education: Information Center

About Form 8863, Education Credits

You do not need to file an amended return.

[Anonymous]

Great, thank you!  I checked the links you mentioned, and I just want to verify.  I have marked that she used $1500 of the scholarship money towards "unqualified expenses" in the 1098-T section of questioning which brings me to the $4000 required for the full AOTC on my taxes.  On her taxes, I went through the 1098-T section and marked that she used $1500 for unqualified expenses, now where do I put that $1500 as income on her tax form?   My thought is to list it under Misc Income not reported on a w-2 or 1099...

Also, I had to put that she used $1505 to get me to the correct amount for the AOTC, but I assume just because it's an oddball number it won't raise any flags with the IRS.  What do you think?

[Carl]

Please do not consider my response as being one to your questions. It's not. It's for others that will be reading this thread.

She lived in the dorms last spring and could very conceivably  apply the full $2486 towards dorms.

Yes, but it won't count as a qualified expense. It will be taxable income to the student. Additionally, the student will be taxed on that specific income at the parent's higher tax rate.

 - Scholarships can only be used for the qualified education expenses of tuition, books, and lab fees. That's it, with no exceptions.

Now Grants can also only be used for those same three qualified education expenses *unless* the grant letter specifies what other expenses that are directly related to the education that the grant money is for. One example would be room and board. One type of grant that is commonly designated for "other things" related to the education is a Pell Grant. If specified, Pell Grant money can be used to pay for baby sitting expenses if such services are necessary in order for the student to attend classes.