Can our daughter claim herself and pay less or can we split the scholarships between our tax return and hers to reduce taxes or qualify for college deductions?

[Hal_Al]

Q1. If a student's scholarships were enough to cover tuition, fees, books and room and board, can they still claim the tax credit based on moving some of the tax-free scholarships to the taxable income of the student?
A1.  Yes
Q2. must the family have been required to pay some portion of room, board or books?  
A2.  No. The "loop hole' does not require that the family be out of pocket
Q3   there an example in which the student has some scholarship money earmarked for tuition that cannot be moved but some scholarships that can be moved?
A3. The ear-marked money will not show on the 1098-T. It will be in your other documents. Modifying the previous example: Student has $10,000 in box 5 of the 1098-T (of which you know $5000 must be used for tuition) and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $5000 as income on her return, the parents can claim $3000 of qualified expenses on their return.

[kc4braves]

Thank you. I thought that was how the example would work but wanted to make sure.  And thanks for clarifying the other questions. I read the entire Pub 970  and was still shaking my head about whether or not someone needed to have paid with a check, credit card or loan for some part of the expenses.  

[kc4braves1]

@Hal_Al I am finally trying to ammend our 2017 tax returns to claim the AOTC for both kids.  Trying to read through all of this to remind myself how I filed everything on our 2018 taxes but still have questions.....and I haven't really gotten to the amendment part...just trying to put the number  off the 1098T in correctly.

We have been talking about Box 1 and Box 5 amounts but what if there is no amount entered for box 1 of the 1098T?  For 2017 my son has an amount in box 2 and box 5 but nothing in box 1. Does this still work or is there no need to ammend his?  Thanks.

[Hal_Al]

The box 2 number can be used, if box 1 is blank (at least for years before 2018).

[kc4braves]

Ok. Thank you.  I wasn't sure because my daughter's 2017 1098T has numbers in box 1 but from a different university. Didn't want to mess it up. I appreciate your help. You have had the best explanations of any that I have read. I could wait and not amend my daughters but my son's already graduated so I don't have an opportunity to recoup any of the missed credits for him except for 2017.

[kc4braves]

@Hal_Al I'm working on amending for 2017 for my son and have another question. $2100 of his scholarship/grant money was a housing scholarship.  His 1098-T shows $6953.10 in box 2 and $8600 in box 5. The additional expenses I have records of = $269.93.  I'm not sure how the $2100 affects the number I show on my return for box 2 and box 5. Can you help? Thanks.

[Carl]

To sum it all up:

Since your daughter *qualifies* to be claimed as your dependent, she has no choice but to select the option to indicate that she "can" be claimed as a dependent on someone else's return. The key word here is "qualify". It does not matter if you actually claim her as your dependent or not. Since she qualifies as your dependent, she has no choice and must indicate that she "can" be claimed as a dependent, weather you actually claim her or not.

There's two things to understand about excess scholarship/grant/529 funds that are not used for qualified education expenses.

1. When you have this situation, it is generally the student that will report all the education stuff on their own tax return. Excess education funds not used for qualified/allowed expenses are then taxable income "to the student", not the parent. You don't have a choice there really. (though depending on exactly what type of funding was received and the amount of that funding, the "loophole" trick works just fine and is perfectly legal.)

2. The excess money that the student will pay taxes on is taxed at the parent's higher tax rate. That's why the student is required to provide on their own tax return, information from your (the parent's) tax return. It's so the correct amount of tax can be figured at the higher tax rate.

[Hal_Al]

QUESTION: $2100 of his scholarship/grant money was a housing scholarship.  His 1098-T shows $6953.10 in box 2 and $8600 in box 5. The additional expenses I have records of = $269.93.  I'm not sure how the $2100 affects the number I show on my return for box 2 and box 5. 

REPLY:  $8600 - 2100 = 6500.  This means that $6500 of the scholarship was used  to cover the $6953.10 in box 2. 6953.10 - 6500 = 453.10 was considered paid by you.  $453.10 + 269.93 = $723.03 of expenses can be used to claim an education credit. 

But, see the discussion about the "loop hole".  You can claim $4000 of qualified expenses, for the credit, if the student claims  $3276.97 (4000-723.03) + 2100  = $5376.97 as income on his return.

[kc4braves]

I understand that we have to claim them and that they cannot claim themselves or the credit. I wish I understood WHY kids have to pay the parent's rate but it is what it is.  I want to be able to claim the credit then I can help them pay the extra taxes.  Just trying to figure it all out.

[kc4braves]

@Hal_Al  That is exactly what I needed to know.  I couldn't remember/figure out what to do with the $2100. Thanks for explaining so well.

[kc4braves]

@Hal_Al So, to double check, on my son's tax return since he had nothing in box 1 on any of his 1098T forms, do we put 0 in box 2 and $5377 in box 5?

[Hal_Al]

Q.   So, to double check, on my son's tax return since he had nothing in box 1 on any of his 1098T forms, do we put 0 in box 2 and $5377 in box 5?

A.  Yes.  As you have surmised, you will have to use a work around in TurboTax and what you describe is the easiest way.  Starting in year 2018, there is no longer a box 2 on the 1098-T, so put 0 in box 1. 

[kc4braves1]

I have used this method for the last two years but this year ( #4) their is an amount in box 4 on my daughter's 1098T. I'm not sure why or what to do with this number while trying to claim the AOTC.  Any input appreciated.

[kc4braves1]

I don't think my previous message posted but if it did just disregard this one.   I am trying to file to get the 4th year AOTC credit for my daughter. I have been using the  method mentioned by @Hal_Al  to move more to taxable income. This year, however, there is an amount in box 4 of her 1098-T.  I am not sure why or what to do with this number when trying to claim AOTC.  Appreciate any advice.  Thanks to Hal_Al for all previous advice.

Kathy

[Hal_Al]

There's not one simple answer to this.  Basically you have to know what the box 4 adjustment is for.  You being refunded money is a common reason. Your billing statements from the school may or may not provide details.

From the IRS instructions for form 1098-T:

Box 4. Shows any adjustment made by an eligible educational institution for a

prior year for qualified tuition and related expenses that were reported on a

prior year Form 1098-T. This amount may reduce any allowable education credit that you claimed for the prior year (may result in an increase in tax liability for the

year of the refund). See “recapture” in the index to Pub. 970 to report a

reduction in your education credit or tuition and fees deduction.