How to Enter this in TurboTax? AOC Coordination with Grants and Scholarships

[Laura22334455]

Info entered from the 1098-T shows that Box 5 (scholarships and grants) were more than Box 1 (Tuition and Fees). Turbo Tax then says not eligible for AOC since scholarships exceed expenses. However, per IRS Pub 970 page 16, IRS allows scholarships/grants to be allocated to non eligible expenses (and reported as income to the student), leaving some expenses to be used for the AOC. My question is, how can I enter this scenario into TurboTax so it will correctly calculate the AOC credit, without using Override? (Below is some text from IRS Pub to better explain the scenario I'm trying to figure out how to enter in TurboTax)

Coordination with Pell grants and other scholarships.
You may be able to increase your American opportunity
credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship
grants in the student's gross income. Your credit may increase only if the amount of the student's qualified education expenses minus the total amount of scholarships and
fellowship grants is less than $4,000. If this situation applies, consider including some or all of the scholarship or
fellowship grant in the student's income in order to treat
the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren't
qualified education expenses such as tuition and related
fees.
Scholarships and fellowship grants that the student includes in income don't reduce the student's qualified education expenses available to figure your American opportunity credit. Thus, including enough scholarship or
fellowship grant in the student's income to report up to
$4,000 in qualified education expenses for your American
opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you
owe even considering any increased tax liability from the
additional income

The fact that the educational institution applies the
scholarship or fellowship grant to qualified education expenses, such as tuition and related fees, doesn't prevent
the student from choosing to apply certain scholarships or
fellowship grants to the student’s actual nonqualified expenses. By making this choice (that is, by including the
part of the scholarship or fellowship grant applied to the
student’s nonqualified expenses in income), the student
may increase taxable income and may be required to file a
tax return. But this allows payments made in cash, by
check, by credit or debit card, or with borrowed funds such
as a student loan to be applied to qualified education expenses.

[Carl]

If memory isn't failing me, I believe @Rick19744 knows how to deal with this in TTX without an overrdie. (If you do an override, then you can't e-file.)

[Rick19744]

Sorry, your memory has failed 😂

Not my area of focus 

[tagteam]

Try @Hal_Al for education questions

[Hal_Al · Accepted solution]

Q. . My question is, how can I enter this scenario into TurboTax so it will correctly calculate the AOC credit, without using Override?

This answer assumes you are the student, not the parent, you can not be claimed as a dependent and that you are eligible to claim the AOC. Most college age students are not eligible*.  It actually easier to enter, in TT, if you are the parent, claiming the credit.  Reply back for instructions. 

A. Using an example: you have $10,000 in box 1 and $15,000 in box 5. You also have $1000 of qualified educational expenses (QEE) for books and course materials, including a required computer. $10,000 + $1,000 = $11,000 total QEE.

Enter the 1098-T at educational expenses. Enter the book expenses. Answer yes when asked if any of the scholarship was used for room and board, then enter the amount of R&B as $8000. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B. 

So, that makes $8000 of your scholarship taxable income because R&B are not qualified expenses for tax free scholarship. The $8000 income will go on line 8r of Schedule 1.  That means only $7000  of the QEE was paid for by tax free scholarship. That frees up $4000 to claim the AOC.  TurboTax will claim the AOC, for you, with this entry technique. 

*There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit. 

You cannot claim a credit if you are, or can be, claimed as a dependent by someone else.

Reference: Line 7 instructions for form 8863. https://www.irs.gov/instructions/i8863

[Laura22334455]

Thank you @Hal_Al !!! Yes, I will be claiming this as a parent for a dependent college student. So, I can just follow your instructions and be sure to add the amount allocated as R&B to the student's income on her own return? Hope I have that right! I finally found my way back to those questions asking for the amount of R&B -- had to delete my daughter as a student, then re-enter and it brought the questions back.  I never would have found it without your help as I had already tried going back to "step by step" and entering directly on the forms, with no luck. 

[Hal_Al · Accepted solution]

As  a parent, it gets easier.

Using the example above, you enter the 1098-T on your return with $4000 in box 1 and box 5 blank.  On her return, you enter the 1098-T with box 1 blank and $8000 inbox 5.  You don't have to bother with the room and board screen or entering books. The $8000 income will go on line 8r of her Schedule 1.

Theoretically, you can enter all the detailed info and TurboTax (TT) will come to the same conclusion. But, it's gets messy and mistakes are frequent. I highly recommend the short cut.  If you do go the hard way, in particular, be on the lookout, on the student return for a box "amount used to claim the credit" (on the parent return). Be sure that's $4000. 

 Is it OK not to enter the 1098-T exactly as received? Yes.  

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. 

If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception. TurboTax will handle this.

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T.  If you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.