Can someone assist in clarifying the 1098T/1099Q and American Opportunity Credit

[1d6594e419ad]

I'm looking for assistance with clarifying how to enter these forms.

For example, undergraduate student (single, no children) in first 4 years of college (meets the requirements for the American Opportunity Credit).  Student is claimed on parent's return. 1098T box 1 ($3500), box 5 ($6000).  Scholarships may be used to pay expenses other than tuition, including room and board.  Books payment of $500.  Room and board $12,000.  The student is also the designated recipient on a 1099Q box 1 ($4000). 

1.) On the parent's return, this does not yield any education break, correct?

2.) This scholarship income contributes to 'unearned income' and the student must file a return?

3.) So then, the student reports the 1098T and expenses on their return?

3.) The student (designated recipient) reports the 1099Q on their return?

4.) The health and transportation fees required by the university, (not captured in box 1 of the 1098T) are always considered unqualified payments and not able to be reported, correct?

5.) Is there any way for the parents to capture any American Opportunity Credit? 

Thank you!

[KrisD15 · Accepted solution]

I assume the student is claimed as your dependent on your return.

1. Maybe

 Tuition and books were 4,000 and scholarships were 6,000 so the student has 2,000 taxable income from that.

Room and board can offset the distribution only, it does not count to offset scholarships and does not count for an education credit. 

No one needs to claim the 1099-Q.

If the student claims all 6,000 of the scholarships, you could have 4,000 towards a credit, which is the max for the American Opportunity Tax Credit. If your Modified Adjusted gross Income is over 180,000 Married Filing Jointly or 90,000 all others, you are not eligible for a credit.

2.No.

 If the student claims scholarship as income, he MAY need to file depending on any other income. Scholarship income counts as "Earned" for the filing threshold. 

3. No, if the student claims scholarship income, he can enter just the amount he needs to claim, in your case the 6,000. 

(You can go to the Education Section under Deductions & Credits, by-pass the entry of Form 1098-T and just enter the amount of scholarship on the "Ant aid not already reported" screen). If he only is reporting 6,ooo scholarship, he will not be required to file a Federal return.

4. Correct, not an education expense.

5. Yes, have the student claim the scholarships. 

Enter Form 1098-T in your TurboTax program and go through the interview. Add the books and supplies. 

At the end, select "Maximize my tax break" and the program may suggest the student claim the scholarships.

If not, type     letme     into the search-box

Click the   "Jump to letme"   link

This takes you to a screen that shows your options and lets you make a selection of what credit you wish to take,

In your situation, don't enter Form 1099-Q. Keep it with your tax file along with receipts for the room and board. 

[1d6594e419ad]

Thank you

[1d6594e419ad]

Thanks for all of the information. So to clarify the process:

1. Enter the full scholarship amount on my student's return under "any aid not already reported".

2. Do not enter any expenses on my student's return.

3. When it asks if student paid for room and board with a scholarship or grant, enter the full amount of the scholarship (as that is accurate in our case)?

4. On the parents' return, enter the tuition paid from the 1098T and the amount for books/supplies from personal receipts?

5. On the parents' return, DO NOT enter the scholarship info from 1098T box 5 (since the student has entered it on theirs)?

6. Hang on to the 1099Q for personal use with documents supporting payments for room and board (as in our case the scholarship + 1099Q distribution does not exceed cost of room and board).

This is what I did, and it did trigger the AOC for the parents and taxed the student for the scholarship.  I just want to make sure I followed all of the steps correctly.

In this scenario, it is counted the student's income as 'unearned' (as seen on form 8615).

[BrittanyS · Accepted solution]

Yes, you are correct with your steps.  

[1d6594e419ad]

So the only conflict I see is that in the previous reply it was said that 'scholarship income was earned income for the filing threshold'.  When following these steps, the scholarship income is showing up as 'unearned' income on Form 8615.  Is this because it wasn't used for qualified education expenses or is it something else?

[AmyC · Accepted solution]

Scholarship income is a hybrid. It is used as earned income for the filing threshold and unearned income for the Kiddie Tax.

We try to get rid of the 1099-Q first with 529 qualified Room and Board to make it nontaxable. Yo succeeded so it isn't entered.

Then we move to AOTC credit for the parents, you need $4,000. You have it with tuition and books.

This leaves the $6,000 scholarship as passive income to the student and subject to the Kiddie Tax. The amount of tax should be low enough that the parent credit for AOTC makes this strategy worthwhile.

You may find that moving numbers around a bit gives you a better refund overall. The IRS allows you to manipulate your AOTC credit vs the student's passive income to create the best scenario.  The IRS has a great brochure that explains how scholarships and tax credits interact.