Thank you so much for the clarifications! These are all quite helpful
One item that remains a bit hazy for me...
So, if my son's scholarship amount (~$3300 for the Fall) exceeds the qualified tuition expenses (the school charges were only ~$1000 after my pre-paid is applied; also, there were other qualified expenses this Fall not charged by school, like a required computer), but I previously paid out of pocket for some qualified expenses (some Fees that will be reported on 1099-T and required computer equipment that will not be reported on 1099-T ~$2000 this year) which of the following is correct:
1.) Can I choose to consider those OOP expenses on my return in order to claim some AOTC, and have my DS pay tax on the scholarship
-OR-
2.) Must I reduce the amount of taxable scholarship by ALL of the qualified expenses (either on 1099-T or not), not take any AOTC, and have DS pay tax on any remaining scholarship amount
Is the application of scholarship vs. OOP funds even an option/choice? (I have read some other threads here and elsewhere that make me think it is a CHOICE; I have seen it stated ~"I opted to treat the scholarship as taxed so that we may claim AOTC")
I am looking forward to next year, with likely 2x scholarship amount (~$6600?) and no additional computer expense, but only ~$1800 in Qualified Fees not covered by my pre-paid 529. The scholarship could cover that, but can I CHOOSE to pay out of pocket (and eventually claim that ~$1800 AOTC) and have DS pay tax on the full scholarship? It's better to get the tax credit and pay tax on the full scholarship on DS' return - even with revised new "kiddie tax" rules (as little as I understand this without running this through TT), I think DS would be exempted from the first $1100, pay $0 tax on the next $1100, and then pay my marginal tax rate 22% on the remaining ~$4800 = ~$1056 tax (??) I would, in this case, still have a net positive tax credit vs. letting the scholarship cover the fees, get no tax credit, and pay a tax on the reduced remaining scholarship amount. Given the choice, it's clear that getting credit is better, but is it a choice?
