I need some help maximizing the AOTC credit, or reducing my tax liability. I used a mix of tax-free university scholarship, Pell Grant, 529 distributions, and out-of-pocket tuition payments to pay my daughter’s education expenses in 2024. Since I have always made the payments, I claim these costs on my return, but this year it’s more complex, and I’m not sure what is the best approach.
The 1098-T, which is in my daughter’s name, shows $9405.50 in Box 1, and $4448 in Box 5. The $4448 is the combination of a $750 tax-free university scholarship and a $3698 Pell Grant. The 1099-Q, in my name since I am the account owner, shows $8199.97 in Box 1. Required books cost $501, room and board cost $5853.47, and I was billed $5357.50 in tuition and fees. 1098-T Box 1 rolls up tuition, fees and the scholarship/grant amount from Box 5. It also was reduced by a $400 housing deposit refund that I originally paid in 2022. I disagree with this and believe 1098-T Box 1 should read $9805.50, but I don’t know if this is worth quibbling over.
I intended the 529 distributions to cover 100% of books, room and board, but only $1095.50 of tuition in order to leave $4262 in out-of-pocket tuition expenses to claim the AOTC. Additionally, I used the scholarship rule to withdraw $750 from the 529 plan, which I understand to be taxable as income but penalty free.
So how and where do I enter all this information to claim the AOTC credit or lower my tax liability? I found that if I enter the out-of-pocket tuition amount ($4262) in the 1098-T page as what I paid for college, I end up with no AOTC. I am also not sure how to report the $750 scholarship rule distribution, or if I need to report the 1099-Q. I’ve also read that the Pell Grant can be reported as earned income in order to reduce tax liability and/or increase the AOTC credit. Is that true and how is this done? I should mention the university automatically reduced my tuition bill by the scholarship and grant amount, and that it stipulated the scholarship had to be used for tuition.
Does it make sense to have my daughter claim anything on her return? She has earned income of about $3150, but no tax was withheld.
I’ve stumped myself on this, and will have to repeat this exercise next year. Any guidance on how to proceed, and if I need to change my strategy going forward, would be appreciated.
