Education

When scholarships are greater than tuition, you can usually still get a credit, but you have to report it just right. (Also, the “phaseout” of the American Opportunity Credit starts at $160,000 of AGI, so only a partial credit is available over that.)

The main concept is that any dollar of “qualifying expenses” (i.e. tuition and fees) can be used for only one tax benefit: to exclude a dollar of the scholarship from taxation or to get a credit (but never both—that’s called “double-dipping,” and can lead to headaches).

The good news is you’re actually allowed to allocate as much as you want of the scholarship to something else besides tuition (like “room & board,” which you’ll see in the TurboTax screens), increasing the tax on that (on the student’s return, if they’re required to file), so you have more tuition to use for the AOC, which is actually larger than that additional tax (sometimes much larger).

Here is the IRS telling us about this treatment, to make you more comfortable with it. With a scholarship that’s paid directly to the school, some people worry that it’s cheating if they treat it like they paid that tuition, but it’s not, as long as the scholarship was not specifically earmarked for tuition. Also, here’s another Community discussion, with some TurboTax specifics.

@jul31, I hope this was clear. It can get tricky, so if you’re unsure about anything as you make the entries, be sure to come back here with questions! The IRS likes to check on education stuff, but hopefully the Community can help you feel confident about this.