1098-T and AOTC

[gordda40]

I am helping my niece and sister-in-law with taxes.  My niece received her 1098-T from college and has more scholarships, etc than qualified expenses, so she will need to claim the excess as income on her return.  However, she did pay tuition out of pocket in the summer of 2018 because not as much aid is available during the summer.  The questions are:  Would the out of pocket tuition cost be eligible for the AOTC and filed on her mom's return?  Would the 1098-T information need to go on both of their returns?  It will be entered on my nieces to claim excess scholarships and grants as income.  When I enter it on her moms return, it indicates no eligibility for any education credits.  How do we make this work correctly so that she can claim a credit for those tuition costs that my niece paid?

[NCperson]

Whomever is listed as the recipient on the 1098-t needs to report it on their taxes

Certain expenses are not deductible in any event which is why the college did not list them in box 1

Please describe what was “out of pocket” during the summer that was not on the 1099-T

Also read the link below carefully
https://www.irs.gov/credits-deductions/individuals/aotc

[BarbL]

The 1098-T causes a lot of confusion, but is really quite simple:

• If a parent claims the child as their dependent,  the parent will claim the 1098-T and education expenses, regardless who paid.
• If the parent does not claim the child as their dependent, the student will claim the 1098-T and education expenses, regardless who paid.
• If the scholarships, grants, and other aid (except loans) is more than the tuition, fees, books, and supplies, the student will claim the 1098-T and education expenses, and will claim the excess aid as taxable income.

Your situation is a bit more complicated, because of the summer tuition.  Was that summer payment included on the 1098-T?  If so, it has already been factored in and there is nothing else to claim or report.  

In some situations, a student is allowed to allocate scholarships to living expenses (rather than tuition, fees, and course materials) and can then use amounts paid out of pocket to qualify for education credits.  However, this depends upon the restrictions of the scholarship.

[gordda40]

Thank you for the reply.  So my niece receives one scholarship that is specifically need to be applied to tuition and books, and is automatically done so by the school.  The other scholarships and grants  are able to be used for any expense.  After going through the 1098-T, the scholarship used for books and tuition is included in box 5, but the only thing in Box 1 is tuition for tuition.  They did not include the cost of the required books or the college billed testing exam fees.  That will add close to 1500.00 to her QHEE, but she still has 1,000 more in scholarships and grants than qualified expenses.   One reason is that the scholarship dedicated for tuition and books place $1750.00 in her account prior to the end of 2018, even though it was for Spring 2019 tuition.

She paid the summer tuition out of pocket and it is included in the amount they have in box 1.  With the exception of the scholarship dedicated to tuition and books, she used her other scholarships to help pay for her housing, along with some 529 money, so she does have an outstanding out of pocket cost of about $2800.00 for the summer tuition.  We have never done this, but how would we go about claiming these expenses and/or scholarships to allow her mom to claim an AOTC?  I would love information on how we make that work in turbotax and I understand you play with the figures to find the sweetspot as far as taxes?

[BarbL]

First, you will have an opportunity to add the expenses for books and other required fees/expenses as you work through the Education section in TurboTax.  It will be in the follow-up questions after the 1098-T entry. 

For the credit, the scholarship income will be reported on the student's return, up to the amount needed to claim the AOTC.  Her parent(s) will then be able to claim the tuition credit on their return because that portion of the tuition was no longer paid by tax-free scholarships. This option is not available if the school’s billing statement shows the scholarships being applied to tuition, or if the scholarship is required to be used for tuition.  

The IRS addresses this on page 62 of the IRS Form 1040 instructions, in the first paragraph under "Line 17c". Form 1040 Instructions

As an example, if your niece received $12,000 in scholarships and paid $9,000 in tuition/fees/etc., she could end up with $3,000 in taxable scholarship income and no AOC for her parent(s).  However, if she claims $7,000 in taxable income, there is $4,000 available for education credits. 

Keep in mind the limitations on claiming the AOTC, which can be found on Page 11 here:  Pub 970

[gordda40]

Thank you so much!  This has been very helpful.  What method would be used to add the additional income to the student's income to see if we can maximize an AOTC on her mom's return?  We entered the 1098-T, put in the additional amount spent on books and fees. and we have just about an excess of 1,000 in scholarship income, so where would we change that to increase it?  Then how do we take that increase and apply it to her mother's return to allow an AOTC to be claimed?

[gordda40]

Yes-so I was able to work through the screens for my niece and added in an allocation of her scholarship money to living expenses that were not restricted to tuition.  The 1098-t was reported on my niece's return.  It appears that in order to get the aotc on my sister-in-laws return, I still had to add in information from my niece's 1098-t on that return as well.  The box that was used to report the amount that we allocated to living expenses on her parents return seems to believe there should be a W-2 or 1099-Misc to report this amount as income?  I put the same allocation amount in the parents as in the nieces, and it provided the amount of the aotc.  With some adjustment of the allocation, all within what she was allowed to allocate, I was able find the sweet spot for the maximum credit for the parent with the least amount of tax impact for the niece.  Hopefully, I thought this through correctly?

[NCperson]

I been watching this thread and want to add a strong word of caution.

the reason to use Turbo Tax (I think!) is that all the rules required to follow the tax rules are imbedded in the software.  All you have to do is copy in the forms received and answer the questions posed honestly.   That is the value TT brings and why millions purchase it and rely on it.

Having a child that goes to college within a household is just not a situation that is out of the TT norm - a lot of folks are in the same boat so the questions posed in this thread are similar to those that millions would otherwise be asking - because the situations is simply not that unusual - and inputting forms received without edits and answering questions posed in the step x step process cause you to comply with the tax laws. 

So attempts to circumvent the questions or think you know more than the software is asking for trouble.  Not suggesting that is occurring here but when i see statement about allocating living expenses or that there are forms missing  it raises red flags for me and that the situation is being 'over thought'. 

It also increases the risk of an IRS audit later because one believes they know more than the Intuit.  that also will invalidate Turbo Tax's warrentee - they will pay the penalties if their software is wrong, but they won't pay if the forms are not copied as presented or the questions are not answered correctly. 

for example what living expenses are you allocating and why? is that question posed by TT or are you rationalizing they can be deducted?  read the IRS link below and the section I copied from that link related to expenses that do not qualify. 

another red flag, "I had to add the AOTC on her form as well".... did answers to questions posed in TT cause that to occur or are you trying to circumvent the software because there is the thought that is the way to maximize the benefits?

I hope this comes across as simply advise and awareness and it doesn't offend anyone - that isn't my intent. 

https://www.irs.gov/credits-deductions/individuals/qualified-ed-expenses

Expenses that Do Not Qualify

Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses:

• Room and board
• Insurance
• Medical expenses (including student health fees)
• Transportation
• Similar personal, living or family expenses

[gordda40]

I followed the  advice of the Tax Expert who graciously posted in regard to possibly allocating scholarship money not designated for tuition and fees to housing.  This has increased my niece's taxable income, but also provided an opportunity to claim the AOTC on her mother's tax form.  I am sorry, but I am not as familiar with how to do this on TurboTax as you and the other millions that you refer to apparently are.   That was why I was asking-so that I was following the correct procedure.   The IRS itself suggests the procedure of allocating scholarships or grants to non-qualified expenses that might be enable families to increase the amount of the AOTC  in Chapter 2 of Publication 970.  I am well aware of what non-qualified expenses would be and what QHEE are.  I am simply looking for advice on how to do things the right way with the software to avoid any issues and to maximize the legal educational tax benefits.

[NCperson]

Simply following the questions in TT is its value - most people don’t know whAt to do and that is why they buy TT and simply follow what is asked in the step x step process . You are not out of the norm for not knowing how to do this! That is why (I think) you bought TT

Also, note the tax expert carefully stated the living expenses could be used “in some situations” based on the scholarship but not “all” situations

My caution is that if you are not following the questions in TT or not inputting the forms received EXACTLY as printed, the risk of doing it incorrectly goes up DRAMATICALLY

[BarbL]

@gordda40, I am working on another project this morning, but will respond to your questions this afternoon.  It sounds as if you have everything entered correctly, except perhaps the 1098-T on the parents' return.

[gordda40]

Yes-I know what the tax expert said and we reviewed my nieces scholarships and grants and found that after deducting the ones that say they must be used for Tuition, we still had many thousands of dollars that were not designated and could be used for qualified or non-qualified.  We are certainly answering the questions as posed by Turbotax and have posted our concerns and will await the Tax Expert's response.  Thank you for your concern.

[gordda40]

Thank you very much!

[BarbL]

Could you go through your entry of the 1098-T on the parents' return?  It sounds as if you marked the wrong box on the page asking "Was any of the student's financial aid already included in income?"  This question is asking about a different type of scholarship, often reported on a W-2 or 1099-MISC.  Respond No to that one, then keep clicking through. 

You are looking for the question "Did student pay for Room and Board with a scholarship or grant?"  This is where you select 'yes' and indicate the amount on the following page.

[BarbL · Accepted solution]

@gordda40 Our conversation was accidentally deleted.  I've attached a screenshot.  This should resolve things for you!