American Opportunity Credit and earned income for independent student

[srd]

My son is a 1st year graduate student, is not our dependent, and is eligible for AOC based on the spring semester of undergrad. My question specifically pertains to the refundable credit portion. In trying to decide if he has enough earned income for the support test, can we count the graduate school tuition waiver for being a TA as earned income?

Pub 970 specifically states this: 

Earned income. Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Earned income includes the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship grant...

Is a tuition waiver the same as a scholarship or grant representing payment for teaching? If so, then it would count in the earned income side in determining the more than 50% support from earned income. He gets both a stipend and tuition waiver and both are contingent on him fulfilling his teaching duties as outlined in his contract. The stipend does already count since that is taxable income. His 1098T does not reflect the tuition waiver, it only shows up on the bill as a credit for tuition. This is in the weeds, thanks for your help! (btw, going forward, he'll be eligible for LL only.)

[DianeC958]

 Under Internal Revenue Service regulation (IRC 127), tuition waivers awarded to graduate assistants are considered to be  taxable income once the total tuition waiver amount exceeds $5,250. This means that graduate assistants who receive more than $5,250 in tuition waivers in a calendar year are taxed on the amount exceeding the allowable amount.

Tuition waivers are considered a Fringe Benefit which is why they are not taxable if under the $5,250 amount.

[srd]

I was under the impression that tuition reductions for graduate students fall under IRC 117d5 and are therefore not taxable as long as both conditions are met.

Pub 970 on page 8 Under Qualified Tuition Reductions says

"Graduate Education

A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met.

• It is provided by an eligible educational institution.

• You are a graduate student who performs teaching or research activities for the educational institution.

You must include in income any other tuition reductions for graduate education that you receive."

Since this exclusion is under the Qualified Scholarship section of the code, would this then be considered earned income for calculation of support for AOC? Earned income in this particular situation includes any part of a scholarship or fellowship received as payment for teaching or research. I just don't know if in this case a tuition reduction is considered a scholarship or fellowship.  

[DianeC958]

No, it would not be considered earned income. The amount of the Tuition Waiver does not show on the 1098-T as a Scholarship nor on any type of tax document. To be considered earned income it would need to be included in income and then excluded. This income is excluded from being included in income.

ITG FAQ #2 Answer-What income is considered earned income?

@srd