Why isn't TT Calculating AOTC to Fully Offset Total Tax?

Q. But since my Tax tax before credits is $1990, why doesn't TT use a different value on line 18 to result in $1990?

A.  It's not sophisticated enough to put the AOTC ahead of the 529 exclusion, in the case of a student, with a 529 distribution, claiming only the non refundable portion of the AOTC.  It's a rare situation. 

I'm not following your answer.

1040 Line 20 is 1768

Sched 3 Line 3 is 1768

TurboTax is telling me it is using AOTC (not LLC) for 1768

Please explain the AOTC math as I have been through Pub970 multiple times. While it does say, "Also, the nonrefundable part of the credit may be limited by the amount of your tax," I am not seeing any examples where that is taken into account. 

You did hit on another point. I don't understand how to make TT shift the 529 expenses.

What does form 8863 say?

Yes, but the problem with 8863 is that it uses the value 1768 (and limiting the credit), because it is getting that value from the Student Info Wks.  That brings us full circle to why is TT not calculating the adjusted qualified expenses as 1990?

Clearly I am missing something, and you may be explaining it correctly.

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I am very appreciative of your help and  am willing to accept that answer. But please provide a citation/example that I can reference. No problem there.  From everything I have read, that is not the issue I am running up against.  Take the very simple case below from IRS Pub 970 page 16. Bill used $4000 for qualified education expenses and therefore got a $2500 credit. $1500 of that is non-refundable and $1000 is refundable. Yet he took the entire $2500 credit because he owed $2506 in taxes. So he is claiming all of the refundable portion ($1500) as non-refundable. Correct? What is different in Bill's case and mine? I assume if Bill only owed $2000k in taxes, then if eligible he would get a $500 refund. AND - if not eligible, he would still get to wipe out the $2000k, but not get any refund.

I have included the entire Student Info Wks table and 8863 info below.

Example 1—No scholarship. Bill Pass, age 28 and unmarried, enrolled full-time in 2020 as a first-year student at a local college to earn a degree in law enforcement. This was his first year of postsecondary education. During 2020, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2020 semester. He and the college meet all the requirements for the American opportunity credit. Bill's adjusted gross income (AGI) and his MAGI, for purposes of figuring his credit, are $34,900. Bill claims the standard deduction of $12,400, resulting in taxable income of $22,500 and an income tax liability before credits of $2,506. Bill claims no credits other than the American opportunity credit. He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of$2,500 and a tax liability after credits of $6 ($2,506 -$2,500).

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I stand corrected.  The AOTC can be allocated to be all non-refundable as the calculations on your form 8863 show.  

So now  the question is how is TurboTax coming up with $1768 as the adjusted qualified expenses.  

It's the $6748 on line 18 of the student info worksheet, "used for exclusion".  

Thank you. 

I agree that the 6748 is the conundrum. I believe that TurboTax comes up with this number during its optimization of figuring out which education credit to take. There is a very good, yet still incomplete explanation in this post .  Note his first comment is "I hate row 18"

How much was the 529 distribution (box 1 of the 1099-Q)? 

1099-Q Box 1 was 13551

15,319-13,551= 1768.  We now know where the 1768 came from. 

$15,319 is the qualifying expenses for the 1099-Q (line 20 column 5 of the student info worksheet).  $13,551 of the expenses is used for the 1099-Q (to totally exclude the 529 distribution). That leaves $1768 to be used for the AOTC.  Note that $13,551 - 6803 = 6748.  Explanation: After allocating room and board ($6803) to the 529 distribution, $6748 of other qualified expenses (tuition and books) are still needed to cover the rest of the 529 plan "exclusion".  Hence $6748 on line 18 of the student info wks.  It's kind of a backed in number. I don't know whether there is another worksheet showing that calculation (maybe the 1099-Q worksheet). 

It will probably come out better ($222+/- better), for your student,  if you designate $1990 of expenses for the AOTC and pay a little tax (less than $25, rough estimate) on the 529 distribution. But, that can be a little tricky to do in TT.

Try this:  Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it (to $1990).  You may reach that screen sooner.  Some users have reported not reaching that screen at all, which requires using a workaround.

Last reply was edited to explain where the $6748 probably came from. 

I can't believe I did not make either of those two connections - arriving at both 1768 and 6748. Thanks for that. I like where you are going with this on being able to change the amount allocated. However, I'm not seeing that option.

From "Your Education Expenses Summary" I select "Edit" for the Student
From the "Here's Your Education Summary" I select "Edit" for Education Information

First screen is "Were You working on a degree....." and answer is yes
Second screen is "What was your enrollment status for 2020?" and answer is Full-time
Third screen is "Had you Earned Four Years of College..." and answer is no
Fourth screen is "Is this your first year of college" and answer is no
Fifth screen is "Did you ever receive AO or Hope?" and answer is no
Sixth screen is asking about felony drug conviction and answer is no

After those questions I get a screen notification that says, "We'll make this entry zero that's no longer needed. Then I am back at the "Here's your education summary"

I've seen this problem in some other posts. Any solution?

No,  I haven't seen a solution to that, other than deleting all educational info and starting over and there's no guarantee even then.  If I remember right, the 1099-Q should be entered before the 1098-T.

Since you are using download/desktop software, the easiest method may be to override the entries on the student info worksheet.  That may prevent e-filing*.  Change  line 18 to 6526 (6748 -222**) and line 17 to 1990.  You can "cancel override" if that doesn't work.  

Alternatively, change line 18 to blank and line 17 to 1990.

* Making entries on the forms prevents e-filing.  I'm not sure about worksheets

** the difference between 1990 and 1768

In case others are searching for my related issue, just wanted to say thanks @Hal_Al for the tip about Editing the Student Education Info.   The page titled "Choosing a larger education credit" allowed me to effectively decline the AOTC.  Here's why I needed to do that:

TT wanted to give me the AOTC, except we only qualified for about 10% of it due to income limits.  Our 529 distributions were exactly what we paid for all qualified education expenses since we weren't planning to reduce distributions by 4000 to use for AOTC.   After entering 1098-T, 1099-Q, and all education related expenses, TT was giving us a $75 in AOTC credit, but then was adding $3500+ to our income, taxed at 22% is a $770 additional tax.   By entering $0 in the Amount Used to Calculate Education Credit, I now have a refund that is about $700 more.   Seems like a bug in the system, but I really appreciate your suggested work around!