My daughter’s college tuition was $9600 (1098-T Box 1) and she had $6000 of tax-free scholarships (Box 6), leaving tuition expenses of $3600 which I paid out of pocket during 2020. I understand this $3600 to be AOTC-qualified expenses. I also paid additional qualified AOTC expenses out of pocket, as well as other qualified educational expenses (QEE), which do not qualify as AOTC expenses (e.g. room and board), but are eligible to be paid from my daughter’s ESA. The first $4000 of AOTC-expenses will be submitted on my tax return to receive the $2500 AOTC credit and QEE above $4000 will be covered by an ESA distribution taken at the end of 2020. Recognizing that I cannot “double-dip” and use the same QEE for the AOTC and an ESA distribution:
1. When completing the TurboTax interview, do I answer $400 for “books and course-related materials”, which is exactly the amount needed to hit $4000 of eligible expenses for the AOTC ($3600 $400), but less than total “books and course-related materials” expenses? Again, I am covering QEE beyond $400 with an ESA distribution, which I coordinated such that I will not be “double dipping” expenses, so really I’m just confused about whether to include just enough “books and course-related materials” expenses to maximize the AOTC at $4000 of expenses, or do I enter the full amount in TurboTax.
2. TurboTax interview covered the 1099-Q received by my daughter. I feel confident that there should be no tax liability for my daughter or me related to the ESA distribution, since the distribution corresponded to the exact amount of QEE beyond $4000. Do we just maintain records for these expenses paid from an ESA distribution or does the ESA distribution somehow show up on my tax return or my daughter’s tax return (she has no income and I don’t think she will need to file since there should be no tax consequence related to this ESA).
