Education Credit

[frustrated9999]

TT tells me we are not eligible for education credits because between her scholarships and 529 money everything is paid for.  Is there a way to change how much of the 529 money goes towards education expenses and how much doesn't.  I want to make $4000 not to go against education expenses so we can claim the AOTC.

[LindaS5247]

If you have entered all of your information correctly into TurboTax and you are not receiving the credit, it is likely you are not eligible for the credit.

These are the basic eligibility requirements:

A student eligible for the American Opportunity tax credit:

• Has not completed the first four years of post-secondary education.
• Enrolls in at least one academic semester during the applicable tax year.
• Maintains at least half-time status in a program leading to a degree or other credential.
• If the student has ever been a state or federal criminal because of a drug conviction, then they aren't eligible for the tax credit.

Qualifying expenses

As long as you’re paying tuition and fees to an eligible educational institution, then you can include the credit.

• Eligible educational institutions can be more than just colleges and universities; they can also include any post-secondary school that satisfies the requirements to participate in the U.S. Department of Education financial aid program.
• So long as the purchased item relates to the program of study, qualifying expenses for the American Opportunity credit can include the cost of:
  • Books
  • Supplies
  • Equipment
• The credit does not cover costs associated with:
  • Room
  • Board
  • Transportation
  • Medical insurance.

The IRS does not require you to reduce qualified expenses by any amount you pay with borrowed funds, such as student loans or credit cards. However, you may not include any amount you receive from,

• tax-free scholarships or fellowships,
• federal Pell grants,
• tuition grants from an employer,
• refunds from the school, and
• other non-taxable assistance you receive, other than gifts and inheritances.

Calculating the American Opportunity Tax Credit

Only one American Opportunity Tax Credit is available per eligible student each tax year.

• If you have two dependents who are eligible students, you may claim a different educational tax benefit for one student if you claim the American Opportunity Credit for the other student; you do not have to claim the same credit for both dependents.
• You can’t claim more than one tax benefit per year for each student.

The credit amount is equal to:

• 100% of the first $2,000 of qualified expenses, plus
• 25% of the expenses in excess of $2,000.
• The maximum annual credit per student is $2,500.

Click here for additional information on the American Opportunity and Lifetime learning Credit.

[Hal_Al]

Q. Is there a way to change how much of the 529 money goes towards education expenses and how much doesn't.  I want to make $4000 not to go against education expenses so we can claim the AOTC.

A.  Yes. And that is usually a good plan.  If the student has any scholarship, a better plan is to make some of the scholarship taxable.

Turbotax (TT) should do that for you, but doesn't always do a good job.  It pays to have an idea of the expected outcome and sometimes a workaround is needed. 

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)? The income limit is $90K ($180K joint return)
• Is the student an undergrad or grad student?
• Is the student a degree candidate attending school half time or more?

______________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The American Opportunity Credit (AOC or AOTC) is 100% of the first $2000 of tuition and 25% of the next $2000 ($2500 maximum credit). The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (on the recipient’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

There is  $1120 of taxable income (on the recipient’s return)

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings.