Q. However, I do want to get $4000 American education credit.
A. The maximum AOTC credit is only $2500. The $4000 is the amount of AQEE needed to get the $2500. The AOTC is 100% of the first $2000 AQEE and 25% of the next $2000. So the $2343 AQEE, currently being used, gets you $2086 of that maximum $2500. You still come out ahead by reallocating more expenses to the AOTC but not by much.
Check my math:
$13,850 (student's maximum standard deduction) - $10,624 earned income = $3226 the amount of scholarship the student should declare taxable. He will owe no tax on the scholarship, but will owe on the 1099-Q.
$8125 -3226 = $4899 scholarship applied to AQEE
$10,450 + 4525 + 18 = 14,993 QEE - 4899 = 10,094 AQEE
$10,094 -$4000 used for the AOTC = $6094 AQEE
$6094 - $5000 applied to parent's 1099-Q = $1094 AQEE left for the student's 1099-Q
$1094 / 10,000 (box1) = 10.94% of the earnings are tax free. 89.06% are taxable.
89. 06% x $6483 (box 2) = $5774 taxable income to line 8z of student's return. The kiddie tax will apply to much of that.
