Most 'experts' say AOTC = 0 if Box 1 'Payments' are less than Box 5 'Grants or Scholarships.' One said your max election from Box 5 to pay taxes on as income is limited to any sum in excess of Box 1. But I know better by claiming almost $7,5000 in Box 5 last year, per an Intuit Accountant's advice that up to $10,000 is claimable from Box 5 as taxable income. Yet, none of the other self-styled tax experts seem competent enough or feel comfortable with this. Can someone suggest a way to explain it so they understand this same process, no matter what software is utilized to prepare tax refunds? Is there a specific IRS Reg or US Tax Code section I can cite for legal reference to support my $10k election preference? Thanks in advance!
There is no $10,000 limit. Any amount, from Box 5, is claimable as taxable income.
Here's your explanation and a reference to IRS instructions, if not actual code.
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 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.
From the 2018 form 1040 instructions (pg 100): “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income.
Thanks for such a fast response. Quite ironically, your reply may lend far more insight by what it fails to say than all details that are expressed. So, is my perception correct that no specific IRS Reg or US Code section makes explicit reference to voluntary election of gift funds as taxable income?
On retrospect, I guess that's why 'loophole' is an apt description for a scenario like this where no explicit prohibition is fair to take as implied legality of some act.
Your original post asked about scholarships. Now you're using the term "gift funds".
No, gifts are not treated as scholarships. But, you could do the same thing with a 529 plan distribution; claim the credit and pay tax on the distribution (plus the 10% penalty)
" So, is my perception correct that no specific IRS Reg or US Code section makes explicit reference to voluntary election of gift funds as taxable income?"
No, it only means I got my answer from an IRS publication and am not personally familiar with the actual tax code section. But, I'm also confident that anything found in an IRS pub has it's basis in the tax law.
Pardon my reference to "gift funds" used interchangably with "grants or scholarships." Does this clariication alter your most recent feedback? If so, please let me know at first opportunity. Thank you again 🙂