Q. I have been paying back a debt I owe to a different university for tuition for a course. I paid $120 toward this debt last year. Would this be included in my educational expenses?
A. No. The reason is that the payment are not for current year education.
Q. Is it still possible for me to claim the AOTC, on 2025 return, by taxing the full amount of my scholarship/grant money?
A. Yes, but probably not the full amount.
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 do this if the conditions of the grant are that it be used to pay for qualified expenses.
Using an example: Student has $17,500 in box 5 of the 1098-T and $10,000 in box 1. At first glance he/she has $7500 of taxable income and nobody can claim the American opportunity credit. But if she reports $11,500 as income on her return, she can claim $4000 of qualified expenses on her return, for the AOC.
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 $10,500 of taxable scholarship income, instead of $11,500.
