At this point, I am confused and very frustrated about the proper way of going about this whole issue of reporting education expenses and scholarships/grants. The TT program is terrible at this!!
I am preparing my daughter's return for her. The first time I entered her information into TT, it came out that she owed $500+ in taxes, which I knew wasn't correct. I think this was because I was reporting the 1099-Q in her return and the 1098-T in our return (the joint return for my wife and me), so she then didn't have any expenses reported to offset the income from the 1099-Q (or something to that effect- I don't remember exactly because I have made several iterations of our returns since then).
I then started making different versions of her return and our return, trying out different ways of doing it to see what the end result was. The bottom line for our joint return is we are over the income for qualifying for the American Opportunity Tax Credit. So, the only possibility was to explore whether my daughter could get the credit.
To this end, I made a version of her return where she was not claimed as a dependent but also did NOT provide more than half her support with earned income (and, yes, that question is specifically asked in the TT interview with no way around it). I entered both the 1099-Q and 1098-T information in her return since they are both in her name. And I included the room and board expenses in that version (apparently from what you say, because the 1099-Q was in her return). But after entering all the expenses and financial aid, the result was that she was ineligible for the AOTC. The only way I could get a result where she was eligible for the AOTC was if I selected that she DID provide more than half of her support with earned income. And even then, it capped it at a $1000 credit instead of the $2500, even though she had plenty of expenses to qualify for the full AOTC.
Her college expenses were enough to use $4000 of the expenses to fully claim the AOTC and far more than needed to exclude the 529 earnings from taxes. Just so you can see them, here is the breakdown of this for her return (following the approach you outlined earlier):
Qualified tuition and related expenses: $16,310.50
Less scholarship/grant payments: -$9,477.00
Less amount used to claim AOTC: -$4,000.00
= Remaining expenses she can use to exclude 529 earnings: $2,833.50
+Other expenses that qualify to be paid from the 529: +$6,980.11
(room & board, textbooks)
=Total expenses she can use to exclude 529 earnings: $9,813.61
She only had $3106.71 of 529 earnings (it was a small 529), so as you can see there are far more remaining expenses than needed to exclude all the 529 earnings from being taxable.
But the bottom line for her is that she is not eligible for any of this since she did NOT provide more than half of her support with earned income (can't include the scholarship/grant monies for this).
So after all is said and done, it appears to me that no education expenses or scholarships need to be reported on either her return or our return since neither she or we are eligible for the AOTC, she had far more education expenses than scholarships and 529 earnings, and she won't pay taxes on the little earned income she had for the year. Is that correct?
In that case, we would claim her as our dependent so we can at least get the $500 credit for that.
If there is a way for my daughter to get a credit for her education expenses even though she did not provide more than half her support, then would you be able to give me specific instructions on how to enter it in the TT program?
Thanks again!
