Tax quesitons on American Opportunity tax credit (AOTC) and 529 qualified education expense

[xu3]

My son attends a four-year university. I am now preparing tax return of 2024. the following is his expenses and payments:

2024 fall term tuition is $9068

2024 fall term scholarship is $7948, so the QEE of 2024 fall term is  9068-7948=$1120.

2024 fall term loan is $2227

2024 fall term R&B is $7443

we bought a $990 laptop for his study use in 2024

we paid $6037 for left balance in his account in Aug 2024.

2025 spring term tuition is $8868, posted to his college account on Dec 11, 2024

2025 first term grants is $7948, credited to his account on Dec 15, 2024,  so QEE of 2025 first term is  $921.

2024 fall term loan is $2227, credited  to his college accoun on Dec 29, 2024

2024 fall term R&B is $7443, posted to his college accoun on Dec 11, 2024

we paid $6036 for left balance of expenses in his account on Jan 2025

I withdraw $8400 from my 529 account in 2024. 

my son's 2024 1098-T, the box1(tuition) is $17936, the box 5(grants) is $15895. I want to claim AOTC in my 2024 tax turn.

Pub 970 says "treat loan sent directly to college as paid on the date the college credit student's account."  so in 2024, we paid $2227  for 2025 first term expense, which is more than QEE of 2025 first term =$921.  Aslo,  the 2025 first term grants were also credited to my son's account in 2024, so all QEE of 2025 first term is paid in 2024, right? 

if so, then, can I, and I have to, use the 1098-T box1 (tuition) of $17936, and box5 (grants) of $15895 to claim AOTC in my 2024 return?  the QEE used to claim AOTC must be paid in the same tax year, right?

if so, will my AQEE for 529 withdraw in 2024 tax return,  be $7443 of 2024 R&B + $990 of laptop +($2227-$921) =$9739?  the ($2227-$921) is paid in 2024, but toward expenses in 2025.

Or my 529 AQEE of 2024 return is the $7443 + $990 =$8433 for the expense of only 2024?

[Hal_Al]

"we paid $6036 for left balance of expenses in his account on Jan 2025"

You cannot count any 2024 expenses (for either the AOTC or 529 distribution) that were not paid until 2025. 

Q. the 2025 first term grants were also credited to my son's account in 2024, so all QEE of 2025 first term is paid in 2024, right? 

A. Only the part paid by grant, unless you records indicate what you paid.

Q.  Can I, and I have to, use the 1098-T box1 (tuition) of $17936, and box5 (grants) of $15895 to claim AOTC in my 2024 return?

A.  The 1098-T is not a controlling document. You use your own records to allocate QEE to the three tax attributes (AOTC, scholarships, 529 distribution). The $990 for the computer is QEE for the AOTC, as would be any books.  Use all QEE you can for the AOTC (but not R&B). 

Q. the QEE used to claim AOTC must be paid in the same tax year, right?

A. Yes. The same for the 529 distribution. 

Your numbers are all over the place, but here's  what I got out of it. $7443 is you net qualified expenses for the 1099-Q.  Your AOTC amount is 1120 + 990 + 920 = $3030. 

If the scholarship is not restricted, to being used for tuition, you can shift another$970 of tuition to the AOTC by having the the student declare $970 of scholarship taxable on his return.  That gets you another 970 x 25% = $243 of AOTC.  Depending on his other income, the student will pay little or no actual tax.

[Hal_Al]

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit regardless of whose money was used to pay the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board which is only qualified for the 1099-Q)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. A student, with no other income, can have up to $14,600 of taxable scholarship (in 2024) and still pay no income tax. 

[xu3 · Accepted solution]

Thanks for your kind reply

Q. the 2025 first term grants were also credited to my son's account in 2024, so all QEE of 2025 first term is paid in 2024, right? 

A. Only the part paid by grant, unless you records indicate what you paid.

For 2025 first term.

the $2227 student loan of 2025 first term was credited into my son's account in 2024, and you told that the student loan is treated as paid by student's own money.  The AQEE for AOTC is $8868 tuition - $7947(grants) =$921.  the $2227 loan can be used to pay off the $921, and left $2227-$921=$1306 to pay toward R&B. 

so I caculate the AQEE of AOTC in my 2024 tax turn will be $1120+$921=$2041. my AQEE of 529 distribution in 2024 tax return is $7443(2024 R&B)+$1306 (pay toward 2025 R&B by student loan) +$990 =$9739. right?

as for $990 laptop, we asked the lecturer if the laptop is a requirement of the course, the lecturer reply with grey answer "You can in principle access the course online and do programing by going to the Computer Lab. it will be extremely inconvenient. A laptop or PC is not strictly a requirement, but in practice, it is almost a requirement", so I think IRS will not allow the laptop as QEE of AOTC. 

Thanks again for your kind help and looking forward to your reply

[Hal_Al]

 A computer is a qualified expense for calculating the AOTC. For a full discussion see:

https://ttlc.intuit.com/community/college-education/discussion/is-a-computer-a-qualified-expense-for...

Your other numbers look about right.

[xu3]

thanks a lots !