Q. Does the $1,800 out-of-pocket qualified expenses need to be deducted from my daughters
return?
A. No. You've essentially done it right, but there are some options.
The best option is for you to use some of the box 1 amount to claim more of the AOTC. You need $4000 total expenses to get the maximum $2500 AOTC. The first $2000 of expenses gets you 100% credit. The next $2000 gets you 25%.
For you to claim $4000 total expenses (including $2200 of tuition from box 1 of the 1098-T), your daughter will need to report $13, 200 of taxable scholarship (instead of only $11,000).
Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400, up to $13,850). It is not earned income for the kiddie tax and other purposes (e.g. EIC ).
Q. Do I need to reduce the taxable scholarships by $1,800 on my daughters return.
A. No, you do not "need to" (have to). But, it is an option.
Q. If so where do I show that amount on my daughters return?
A. After entering the 1098-T, there is a follow up question about other expenses.
Q. Do I need to remove the $1,800 from my return.
A. Yes, but only if you use it as an expenses on her return. As previously stated, it is usually better if the parent claims educational expenses on their return.
Another issue:
Q. Can your daughter claim the AOTC on her return?
A. Usually not. But In your/her case, yes, because she has a tax liability. But it's most likely best if you claim it instead.
While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out. A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support. It is usually best if the parent claims that credit.
If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit. The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)
