!098T and 1099Q

[dulang]

I have used TT for more than 20 years and never have I run into anything as confusing as this. Been working this for a month without ever being sure of where I am. Here's the data.

I am grandparent 529 owner.

student beneficiary is dependent of parent.

1098T Box 1 $28180, my records show $23184

1099T Box 5 $13600

no other scholarships

Box 5 does not include 529 payments

no scholarship restriction

1099Q Box 1 $24717

1099Q Box 2 $17015

Student name on 1099Q

Room & Board $10356

Other QE $67 books

Other taxable income $7385 W2

Parent claiming $2500 AOTC credit for $4000 of QE

freshman

529 has unreturned $265 overwithdrawal

Help!

[AmyC]

I am simple. Work through the goals, no 1099-Q, get AOTC.

Let's start with the 1099-Q of $24,717. Subtract room and board $10,356 = $14,361 left to use on tuition. The 1099-Q is completely used on education expenses and does not need to be entered. Tuck it away. I don't see an over withdrawal.

Box 1 of 1098T shows tuition of $28,180 Let's subtract out the part paid by the 1099-Q of $14,361 leaves $13,819 to manipulate. We want $4,000 to be paid by the parents to claim AOTC. Sp $13,819 - $4,000 = $9,819 paid by scholarships.

Box 5 of 1098T is $13,600 and it paid $9,819 of the tuition money. This leaves $3,781 to cover other expenses. Books $67 and any other supplies would be subtracted from the $3,781 and the remainder will be scholarship income to the student.

W2 income $7385 plus scholarship income = $11,099 which is not required to file unless a refund of monies withheld is desired.

[dulang]

Thanks but this is neither simple nor obvious. It is so unstructured that I can't relate it to any other tax process I have ever encountered. It seems to require addressing tuition, scholarships and expenses, each at a gross level versus netting them out against each other first. Not used to that kind of ad-libbing with taxes. Couple of questions/comments:

1. Is it fair to say that the following determined the sequence you followed?

AOTC does not cover room & board.

Use all of the 1099Q money first.

Apply scholarship/ grant money to any remaining tuition.

Anything left is add'l income.

2. This process looks programmable to me. I don't understand why it is not automated better within TT. I don't know if I can stand this for five more years. Altho I'm a 20 year customer, I'm going to be shopping around.

Thanks again for your help. Now I have to figure state.

[dulang]

Did not enter 1098T or 1099Q data. If I enter the remaining scholarship income $3714 on schedule 1 as misc income, TT considers that taxable. It uses $7785 as a std deduction so $11099-$7785=$3314 taxable. That look right?

[AmyC]

1. Yes. AOTC is only for tuition, books, etc.

The 1099-Q can cover room and board plus AOTC expenses.

2. This is a very complicated area and my goals are always to maximize the education credit and eliminate the 1099-Q. There are a lot of moving parts and this is where tax knowledge comes into play. If you enter the 1099-Q, the program believes you. If you enter tuition instead of room and board, it will take it.

We are here to help with the process. AOTC is only good 4 times then it switches to Lifetime Learning Credit which only covers tuition.

3. You want to:

• enter the 1098-T on your return and have it showing $4,000 of expenses paid by you to get the full AOTC credit of $2,500. A dollar for dollar deduction against your tax liability.
• enter the 1098-T on student return and have it show scholarship income of $3,781 minus books and other supplies.

You don't want to use Misc income when you can use scholarship. The scholarship income goes with wages instead.

[dulang]

It looks to me like after entering the 1098T and 1099Q in the dependents return that TT applies the scholarship credits before the 529 credits resulting in 529 QTP addl income instead of a (more desireable?) scholarship addl income result. Am I reading this right? Most of the guidance I am getting says to apply the 529 withdrawals fully before applying the scholarship credits and don't even enter the 1099Q if fully used. What I don't understand from AmyC's reply below is HOW to enter the 1099T As described in her point #3. The program asks for the expense amt that AOTC is using but I don't understand how to "  enter the 1098-T on student return and have it show scholarship income of $3,781 minus books and other supplies."

[AmyC]

For your return:

Enter the 1098-T as is

Box 1 $28,180 

Box 5 $13,600

This will take the $4,000 and use it towards the AOTC. You have a paper trail if the IRS asks from this thread and your paperwork.

For the student return:

To get $3781 or less there are two ways. The correct method is to add the 1099-Q before the 1098-T but the program wants to reserve $10,000 for Lifetime Credit so that is not the best method.

Enter the 1098-T

Continue entering

Education summary, select Scholarships/ Grants

Other aid, yes

Enter the amount needed for the correct taxable income.

$18,361 gives you $3,781 taxable. This can be seen on sch 1 under Scholarship

[dulang]

If you follow the proper sequence and enter the Q first before the T, does the program still try to use $10,000 for the AOTC credit IF you have adjusted that amount downward to $4,000 on the screen that asks how much expense you are allocating to the AOTC?

[TeresaM]

Yes, it should use the qualified expenses for the 529 distribution without reserving it for the education credits if you enter all the income, then the Form 1099-Q, and then the Expenses and Scholarships ( Form 1099-T section). 

If it is entered out of order, the system may be reserving $10,000 of educational expenses toward an education credit, either American Opportunity Credit or Lifetime Learning Credit.  You may want to see if that leads to qualify for a credit, but if it does not, or if it will cause part of your 529 distribution to become taxable, then yes, it is fine to change that field to zero or a different number above the amount of the 529 distribution. 

If room and board were paid from the 529 distribution, please go back through the Education Credit section and be sure those were entered.  That is not a qualifying expense for the Education credits but can be used with 529 funds.