I am on a Mac with TurboTax Desktop. I am the parent filing our taxes.
My daughter has QEE from 1098-T box 1 $27008.00
Scholarships 1098-T box 5 $15750.00
Additional QHEE for the purpose of
QTP/529 and ESA/Coverdell disbursements. $6358.48
Disburs. from QTP/529 to me the parent $17336.00 earnings - $2087 basis $15249
Disburs. from Coverdell/ESA to daughter $275.28
Turbotax is first applying scholarships toward the QEE as I would expect and getting $11258.00 "left over."
27008-15750 =11258
Then turbotax applies the 11258 toward the QEE disbursements not covered by the scholarships so that they aren't taxable, but they are also not giving us the Lifetime Learning Credit (LLC). We have already used the American Opportunities Credit (2019, 2020, 2021 and 2022). Expenses for her spring semester of her senior year in 2023 were paid in 2023 so as I understand it, the LLC should be able to be used.
My understanding is that in order to take the LLC, $10,000 from the QTP/ESA disbursements would now need to be considered income (I was taking it on parents return since the large QTP check was made out to me) to get the credit. Since the QEE as calculated by turbotax and listed above (11258) is greater than $10,000 (needed for LLC) and below the amount of her scholarships, my understanding is that there is no 10% penalty on the disbursement income - only regular tax on the earnings part applied to the $10,000.
I have tried tricking turbotax into giving the credit and no penalty, but nothing I tried worked.
A post from 2021 says
There are three things you can do with your Qualified educational expenses (QEE):
- Allocate then to scholarships (so that the scholarship remains tax free)
- Use them to claim an education credit
- Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable
and that turbotax allocates them in that order, but that does not seem to be the case now - the last two seem to be switched.
How can I get turbotax to consider $10,000 of the QTP disbursement to be income, give us the education credit and not take the 10% tax penalty? Or where am I misunderstanding what is going on?
