With only one semester and generous scholarships in 2023, my college freshman has few qualified expenses. So I’ve been confused about 1) if we can take the American Opportunity Tax Credit (AOTC) with our 529 distribution (part non-qualified), 2) if we can use the IRS “workaround” of reporting scholarships as student income to increase the credit, and 3) if all this is moot because some of the scholarship is taxable (triggering kiddie tax?) – or we just don’t have enough expenses.
Re: “qualified educational expenses.” IRS Pub. 970 says only tuition, fees and books/supplies are QEE. In prior threads, @Hal_AI included Room & Board in “total” qualified expenses when reconciling 529 expenses with IRS/AOTC-qualified expenses, which gives me hope. But if we count only IRS-expenses less scholarships, we’re in negative territory. (No expenses for the credit.)
total QEE: $12,510 (tuition, fees, R&B, books less $300 credit)
less scholarships: -$ 9,567 ($4,895 tuition only; $4,672 “unrestricted”)
we paid: $ 2,943 (Direct bill: $2,159 + $784.43 books/supplies)
less AOTC QEE: -$ 1,574* (actual expenses: $790 fees + $784.43 books)
Equals: $ 1,369 against 1099-Q/Room & Board ($6,341)
Is $1,574 the max AOTC we can claim? Our 529 distribution of $4,000 (paid to student) had earnings of $106.39, so the tax on that is tiny. ($69.98 taxable earnings; no federal and 1% state tax = $.70)
However, if I use only tuition, fees + books, then I get $6,469.43 QEE ($6,169.43 after $300 credit), and after subtracting scholarships ($9,567), our AQEE is – $3,397.57. So is $3,398 in scholarships taxable to our student?? Does this void all attempts at claiming AOTC and trigger kiddie tax?
Can we still claim $2,943 in 529 AQEE against our $4,000 distribution? If so, my rough calcs are:
$2,935 (student earned income) + $3,398 (taxable schol./unearned?) + $27.75 (529 earnings/unearned) = $6,360.75 total income – $3,335 dependent deduction = $3,025.75 taxable income ( >$2,500 = Kiddie tax??)
So there’s no way to report any scholarship as income to increase QEE or decrease tax on scholarships? ($4,672 unrestricted scholarship – $3,398 taxable = $1,274 tax-free, reportable scholarship?)
Final note: 1098-T Box 1 = $10,526 (actual bill: $12,026) and Box 5 = $9,567. Assuming our total scholarships ($9,587) are still not tax-free? Must I enter 1098-T on our return, and the 1099-Q on my student’s?
I’m sorry, this is a lot. Any help is greatly appreciated!
