How to Enter Scholarship Income So As To Take Full Advantage of AOC

[mercermom]

My son graduated from college in 2024 and is trying to use the "loophole" suggested by the IRS in Pub 970 to take advantage of the American Opportunities Credit (AOC) even though he had a substantial scholarship. He is trying to increase his taxable scholarship income by $1,700  (he has $300 in book expenses) in Turbo Tax so as to be able to claim $2,000 in AOC. From what I have read, it appears that he does qualify to take the AOC (he supported himself from earned income, he was a full-time student before graduation, no one has claimed his AOC for 4 years, he doesn't have any convictions, etc.). 

This is his information:

Earned Income per W-2 = $47,000

Dividend Income = $1,000

Tuition per 1098-T = $8,000

Scholarship per 1098-T = $23,000

Qualified Expenses (books) = $300

No matter how he has tried to increase his scholarship income and qualified expenses in Turbo Tax he gets a message that he is not eligible for an education credit.  Turbo Tax says the reasons why he may not qualify are:

Somebody else can claim him as a dependent

Scholarships exceed educational expenses

There were no no net qualified educational expenses

How does he enter this information into Turbo Tax so it will make $1,700 more of his scholarship taxable and allow him to take $2,000 of the AOC?

[AmyC · Accepted solution]

Let's fix the reasons first:

1. Somebody else can claim him - go back through the personal profile and uncheck that box

2. Scholarships need to be applied to room and board -the scholarships clearly include room and board. Verify that you aren't using any restricted funds  (required for tuition) towards room and board.

3. Let's shoot for the full $4k of credit and then you can adjust the numbers to find the sweet spot.

You have $8300 of qualified tuition and books, we need $4k. This leaves $4300 to be covered by scholarships.

Scholarships are 23,000 - $4300 to expenses = $18700 to room and board

You can see the full AOTC and move less money to room and board if you want to reduce the AOTC credit. You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers). It doesn't look like that is a problem here.

[mercermom]

Thank you for your help. I've had a frustrating time but I finally got it to work. Here's what I did that worked that may help other people in this situation. 

1. The box to indicate my son was a dependent wasn't checked on the personal profile but I kept getting the message that could be the reason he didn't qualify for the AOC. It's possible that, at some point, in completing the return that box had been checked and then I had gone back and fixed it but TT didn't register the change. The only way I was able to get TT to recognize that my son wasn't a dependent was to completely start a new return. It was a pain but it worked. 

3. It is confusing if the scholarship income and tuition expenses should be entered as Misc Income (under Wages & Income) or in the Education section (under Deductions & Credits). I entered the numbers as suggested and then adjusted to find the sweet spot. The only way I could find to change the numbers around was to delete the 1098-T worksheet under Forms in my Return. Every time I deleted it, TT let me go through the interview section of Misc Income again and enter new numbers. It took some time, but it worked.