Q. Is my 2023 Form 8863 return wrong?
A. No. You are allowed to count (for the AOTC) payments made in 2023 for qualified expenses incurred in the first term of 2024.
Q. Should I file an amended 2023 return to correct it?
A. No. You qualify for the full ($1000 + $1500 = $2500) AOTC for 2023.
Q. How do I handle 2024's Form 8863? Will adjustments to Box 1 and/or Box 5 be needed due to whatever the answer is for tax year 2023?
A. Yes. Do not count 2024 expenses that were paid in 2023 (and claimed on your 2023 form 8863). Based on how the school did it, on the 2023 1098-T, they will probably not include the $2040.01 in box 1 of the 2024 1098-T.
Your situation is a little simpler than those described at the other post ( this one ). But, as you noted it can get complicated. The key is: use you own records.
Some of the scholarship may end up being taxable to the student. Here's my standard reply on that subject:
There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot usually do this if the if the conditions of the grant are that it be used to pay for qualified expenses.
Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.
Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.
