It depends. Whoever claims the student and exemption, claims the education credit. If your parents are claiming you, then they get the education credit and you pay the tax. Usually parents have a higher tax liability and the credit is much more valuable to them. See What You Need to Know about AOTC and LLC.
If your parents are not claiming you:
Here is what you need to do:
- If you are ineligible for both credits - don't change the numbers or allocation, reduce your tax liability by claiming the scholarships against the tuition.
- If you are eligible for the LLC- you want $10,000 of tuition expenses for the full amount. The LLC will be 20% of your tuition paid. Use the scholarship for room and board above the $10k tuition limit. For example:
- Box 1 $25k and box 5 is $40k.
- You need $10k for tuition, this leaves $15k available to be covered by scholarships.
- $40k scholarships used $15k for tuition, then remainder, $25k went to room and board.
- If you are eligible for the AOTC, you want to shift numbers around to find a sweet spot. The AOTC reduces tax liability and then has a refundable portion. The magic number is $4,000 for tuition.
- Same box 1 and box 5 as above
- You need $4k for tuition, this leaves $21k to be covered by scholarships.
- $40k scholarships total - $21k to tuition leaves $19k to room and board.
Check form 8863 for education credits. Adjust numbers for room and board to maximize your refund. This is allowed. The IRS has a great brochure that explains how scholarships and tax credits interact.
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