American Opportunity Tax Credit AOTC and 529

[jlar]

I used a 529 distribution to pay my daughters Fall 2019 college tuition. She received a 1099-Q for the distribution with stated 'Box 2' interest earnings. Can I claim $4000 of the tuition on my return to receive the full American Opportunity Tax Credit (AOTC) and shift the remaining qualified tuition expenditure to her return to reduce the taxable earnings portion on the 529 distribution? I otherwise qualify for the AOTC. I've researched this and this is what I came up with to avoid the 'no double dipping' rule. For specifics, net tuition after school provided direct scholarships was $7590. That is the amount my daughter received from the 529 on the 1099-Q. The Box 2 interest earnings were 4618.33. So if I use $4000 of that qualified $7590 tuition on my return to claim the full $2500 AOTC credit, that would leave $3590 that my daughter could put on her return as qualified tuition to offset the 529 earnings. Since taxes for her would only be on the earnings portion (the $4818.33 Box 2 amount), that would leave her with (4618.33 -3590 =$1028.33) exposed / non-sheltered income. I'm guessing the tax on that is capital gains of 15% ($1028.33 X 15% = $154.25) ...which is still far less than the amount I'd be giving up by foregoing the tax credit (25% on the second $2000 of qualified tuition). Is this a correct assessment of this situation? Can I so split the qualified tuition paid via 529 across mine and my daughters returns so I still get the AOTC and shelter part of the 1099-Q earnings on her return? Thanks!

[NCperson]

 I follow and agree with you until you got to this statement: 

"$3590 that my daughter could put on her return as qualified tuition to offset the 529 earnings."

$3,590 of the $7,590 or 47.3% that was in box 1 is not sheltered,  That means that  47.3% of box 2 is not sheltered as well.  So 47.3% of $4618 = $2184 will be earned income on her tax filing (I assume her social security number was on the statement - being the beneficiary isn't the critical factor, it's the social security number that is the critical determinant of whose tax filing the 1099Q goes on).  

if her income is lesser of earned income +$350 or $12,200, she is not required to file (unless there are withholdings in which case the only way to get the money refunded is to file)

and then, yes, to this question: 

Can I so split the qualified tuition paid via 529 across mine and my daughters returns so I still get the AOTC and shelter part of the 1099-Q earnings on her return? Thanks!

[MinhT1]

Yes, you are correct. You have the right to split tuition as you proposed. The 1098-T will be entered on your return. You will use $4,000 of tuition on your return to get the maximum American Opportunity credit of $2,500.

The remaining tuition of $3590 plus room and board plus books and equipment expenses will be used  to cover the 1099-Q. Any excess withdrawals will be subject to tax and penalty.

This is absolutely legal and is the most tax efficient solution.

@NCperson 

Edited  2/20/2020  |  7:48 PM

[NCperson]

@MinhT1 - the 1098-T ONLY goes on the parents return (assuming that the student is a dependent and Box 1 Exceeds Box 5).   

Can you please document where on the IRS website it states that the one form is to be input on BOTH tax returns in this circumstance? I can not find that reference. 

[MinhT1]

I have edited my answer.

[jlar]

Thank you for your reply. It seems there is still some question about this as per other replies...ie being able to put tuition from the 1099-T on both my return and my daughters return. The 10990-Q belongs to my daughter with her SS#.  I thought it would be more clear, but I'm still not certain how to split this....or if 'can' split this to reduce exposure on her return for taxes and penalty.

[jlar]

Thank you again to those who replied....maybe this info will help someone else. 

Unfortunately, I am not seeing any way in TurboTax 2019 to 'split' the 1099-T qualified tuition across the returns.

I ran my daughters taxes with and without any 529 distributions and the impact comes down to this:

-the $4618 earned on the 529 is taxable income (10% marginal rate) plus the penalty (10%). This result is $929 she owes on fed tax (her income exceeds the standard deduction)...even if her income didn't exceed the 12,200 standard deduction, the penalty portion would still apply ($461.80; i think). It's still better for me to claim the  full 1099-T and take the total $2500 AOTC credit but a 1000 dollar swing here at the end is a little disappointing. I may have to go see a tax professional to see if they have some 'magic' to handle this different....in Turbo Tax I'm not seeing a way to do anything else...not to mention, there is some problem with form 8615 (unearned income) that is 'not ready' yet so we can't even file if we wanted to. What a joke....

This was only for one semester so we're going to be hit double on this in the next 2 years.

If anyone else has any suggestions please respond to this thread. 

Good luck to all and Thank you!

[NCperson]

@jlar - let's see if we can work through this as it is quite confusing.  Please answer the following questions.

For Form 1098-T,  how many dollars area in Box 1? Box 5? are there any amounts in any of the other boxes? if so, what boxes and what amounts.

For form 1099Q, you already stated earlier in the thread what is in Box 1 and Box 2 and that the SS# on the form was your daughter's, which normally means the payment went from the 529 administrator directly to the college. 

Once you respond, I can figure this out. 

[Hal_Al]

The 10% penalty does not apply.  Having diverted some of the qualified expenses to the AOTC is a penalty exception.

[jlar]

@NCperson -  thank you for trying to help!

1098-T Box1=24215.00

Box 5=16650

No other $ in boxes

And yes, it went directly to the college. The 16650 is her annual scholarship directly from the school. I paid the $7590 via 529 for the fall semester. I was late paying for the winter 2020 semester and paid $7590 for that on Jan 2nd -otherwise I'd be seeing a bigger number in box 1 like i did last year (24215 +7590). Not sure what a mess that is going to make next year! BTW, last year I paid all cash for the whole year so had no 529 distributions...and took the full AOTC on my return. Not sure that was the right move in hindsight.

So what I've gathered is that you CANNOT shift funds around from the 1098T between returns. That is, you either decide to put the qualified tuition on the parents form and take the AOTC, or you forgo the AOTC on the parents form and use the 1098T dollars on the child/student return to shelter the distribution.   Is that correct???

The earned interest (1099-Q Box 2) of 4618.33 is being added to my daughters 'income'...and because she is over the Standard Deduction on income, that is being taxed at her marginal rate (10%). There is also a 10% penalty being added (461.80). That $923 tax/penalty appears to be the 'cost' of me taking the AOTC on my return. I'm still 'net' $1577 (2500-923).

There were other comments about 'determining the percentage' of unsheltered earnings...and I also read about that in IRS Publication 970. But honestly I was just hoping TurboTax would do all those calculations for me. She also had some books and other expenses I thought I could add to her return directly to help shelter the 4618 but I can't see a way to do that either...almost like ALL the qualified expenses get 'pinned' to the parent return when you go that route.

Thanks again for any additional guidance.

[jlar]

Thank you to the other folks who have replied here as well. I really appreciate your help! I find it odd that this is so confusing. I can't be the only one trying to figure this out, although every situation is always a little different.

[NCperson]

1) post the 1099-T on to YOUR tax return.  Since Box 1 exceeds Box 5 by $7565, you should get the AOC credit of $2500 since there is more than $4,000 available from the 1098-T.  Did that occur? 

2) you have $3,565 left that is not "consumed"  ($7565 - $4000)

3) Since the administrator sent $7590 from the 529 plan, it covers the remaining $3565 of the uncovered expenses, leaving $4,025 of the 529 plan ($7590 - $3565) distribution looking for something to cover. 

4) How much was room and board and the non-required books?  as long as that exceeds $4025, then there is no need for your daughter to post the 1099-Q onto her tax return at all!  Just make note of the math (as I have described above) and put it away as documentation in the oft chance the IRS asks (quite unlikely)

[jlar]

@NCperson 

Thank you again for your consideration on this.

Number 1 did occur. But we have no room and board so #4 is moot.

It sounds like this is still a concept of 'shifting' dollars around to cover both the AOTC 4k qualification on my return and the sheltering of unearned interest on my daughters return. You are just suggesting using expenses (in this case room and board) that are not shown on the 1098-T instead of tuition to accomplish that 'shifting'....but they are both still just 'qualified expenses' (and the question of whether such shifting is allowable is still at large). And even if we had room and board, I still see no place to enter that into TurboTax.

Since I can't do #4 anyway, I'm back to needing to try to find some way to mechanically do this on the forms (and figure out if this is appropriate). At best, this is apparently an 'edge case' that the TurboTax UI can't handle. If there is a 'hack', meaning a way to go in and adjust the forms manually, I'd like to find that.

I'm not sure I like the idea of just 'not including' a form as that sounds like a red flag to me.

Even if I can find a way to shift some of the qualified 1098T tuition to my daughters return she still has maybe around $2500 of unearned interest, with an approximate $500 tax and penalty.

If I take this into a tax preparer they are going to charge me at least $400 (around here)...so its about a wash as far as 'net' taxes and costs are concerned (I'm down 900'ish now...would still be down 500 + 400 to a tax person). So if I can't get a cheap answer on this I'll just keep it as it is. But I think it's pretty crappy. We clearly owe more taxes than we thought...and that seems to be the 'cost' of using the AOTC in some cases.

The concise (albeit wordy) questions I'd like answers to:

1) When claiming the Federal American Opportunity Tax Credit (AOTC) based on a dependents qualified 1098-T tuition, can remaining 1098-T tuition amounts in excess of the $4000 required to get the AOTC credit be shifted to the dependents return to be used as an offset against  unearned income resulting from a 529 distribution (1099-Q Box 2 earnings), where the 1009-Q was issued to the dependent with their SS# ?

2) If such shifting of tuition costs between forms as described in #1 is allowable under IRS guidelines, is there a way to enter this scenario into TurboTax 2019 via the TurboTax walk-through interface, and if not via the interface, are there manual form level adjustments that can be made to accomplish this?

I will consult with a CPA and post back here what they tell me so hopefully there is  clarity for all.

Thanks to everyone who tried to help on this.

[jlar]

@Hal_Al 

Thank you for the reply. 

Your comment about the 'penalty exception' is mentioned in this article: 

https://www.savingforcollege.com/article/reporting-529-plan-withdrawals-on-your-federal-tax-return

This would be great if I she only needed to pay the 'income' tax portion of the remaining unearned income not offset by the tuition balance. However, I still can't figure out how to enter these numbers into turboTax 2109 or how to manually adjust the forms.

The linked article confirms some of the guidance I'm getting - ie that its allowable to 'shift' some of the 1098-T qualified tuition expenses between returns - e.g. claim $4000 on my return to get the AOTC and use the remained of tuition on my daughters return to offset the 529 distribution earnings.

I'm starting to feel like this should be really simple...and either I'm missing something easy or TurboTax 2019 is just making it hard!

[jlar]

Here is another great post by @Hal_Al that seems to answer all these questions:

https://ttlc.intuit.com/community/college-education/discussion/can-i-deduct-college-tuition-for-my-s...

I feel like I'm getting closer but still not exactly sure how to enter this stuff into TurboTax 2019.