TurboTax won't allow me to pick American Opportunity Credit vs. Lifetime Learning Credit, but the distinction matters!

dnfrieden · ‎February 1, 2024

The feature where TurboTax picks the appropriate Education Credit for you (American Opportunity vs. Lifetime Learning) fails to pick the correct one needed in this very specific situation, which you can recreate with the following scenario:

College-age child's return:

Could be considered a dependent on parents' tax form, but will not be
Meets all requirements for both credits (although doesn't meet "support" test required for refundable portion of AOC credit)
Has plenty of 1098-T tuition expense (even after adjusted for tax-free scholarship grants) to qualify for full amount of either credit, but
Has an income low enough that she only qualifies for an education credit of $1,080 regardless of which credit is chosen (AOC vs. LLC)... any additional credit would push her into refundable territory which she doesn't qualify for.

In this scenario, TurboTax says either credit is available to her and worth the same amount ($1,080), and then it chooses the LLC. And it doesn't let the user override this choice. But this choice of LLC (instead of AOC) causes problems in the parents' return related to their 529 plan (i.e. Qualified Tuition Program, QTP) withdrawals.

Parents' Return:

The college age child is not listed as a dependent
Parents withdrew $26,000 from 529 Plan as indicated on parent's 1099-Q (where "recipient" is the parent)
In the math necessary for ensuring "No Double Benefit" (Pub 970, p. 14) and for ensuring proper "Coordination With American Opportunity Credit" (Pub 970, p. 52), the parents must use the following number that comes from the child's tax return: "Expenses taken into account in figuring education credit", which is Form 8863, Line 27 (for AOC) or Form 8863, Line 31 (for LLC)
The following is the rules for computing the credit from the qualified expenses for the two credits:
- AOC: 100% of first $2,000 (of qualified expenses), then 25% of next $2,000
- LLC: 20% of the first $10,000 with maximum credit of $2,000 per return.
Using the above rules, with the AOC, the "expense taken into account in figuring the education credit" would be $1,080. Whereas with the LLC, it would be 5 times larger, which is: $5,400

Now consider the math:

If the child uses the AOC, the parents' math related to the permissible tax-free withdrawal of their 529 account is:

$40,000 - Total Qualified Education Expenses
(minus) $12,920 - Tax-free scholarships
(minus) $ 1,080 - Expenses taken into account in figuring AOC
(equals) $26,000 - Maximum amount you can withdraw from 529 tax-free

And in this situation, their entire $26,000 withdrawal is tax-free. This is why the parents want for the child to use the AOC credit.

Now, consider what happens when TurboTax is forcing the child to use the LLC credit (as is currently the case)

$40,000 - Total Qualified Education Expenses
(minus) $12,920 - Tax-free scholarships
(minus) $ 5,400 - Expenses taken into account in figuring LLC
(equals) $21,680 - Maximum amount you can withdraw from 529 tax-free

And in this case, only $21,680 of the parents' $26,000 withdrawal would be tax free. Which would force them to pay taxes on $4,320 of that withdrawal.

This is why I consider this a bug. By not letting the child choose the AOC over the LLC, the parents would be forced to pay more in taxes.

Please eliminate this bug so that I can continue to use TurboTax to do our taxes. The bug fix should technically consist of two things: 1) Letting the user specify they wish to use the AOC in this scenario, and 2) Ensuring that the user has the ability to control what ultimately goes into Form 8863, Line 27. The user should be allowed to put a value less than $4,000 (i.e. $1,080 in my example) even if they have $4,000 (or more) worth of expenses.