@Paul90
Q. 1. I opened the form to input to the 1098-T, but since that form only has what the school received and scholarship amount, I don't see where I'm able to claim what was paid out of pocket (from previously funded prepaid plan).
A.1. You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid.
Q.2. For example, if there was $2000 paid from the prepaid fund, how do I get to take the American Opportunity Tax Credit (AOTC) for it?
A.2. Enter as described in Q/A 1. But, that means you daughter will have to declare some of the Pre Paid tuition distribution as taxable. You can and should claim the full $4000 needed to get the maximum AOTC That may mean she also needs to declare some of her scholarship as taxable too (see example below).Yeah, I know , it just got more complicated!
Q.3. I go to my return to enter in the 1098-T info the Tuition and enrollment fees portion is already hard coded as $0.
A.3.
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 the section you want to change; tuition, in your case.
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There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.
Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.
