Tax Year Prior to 2020: Scholarship amount exceeds tuition.

[videot7]

We are having a problem with TT taking our tuition tax credit to 0 due to scholarships exceeding the tuition reported.  I know why this is happening, just not what to do about it.

Our 22 year old son (who is a dependent for tax purposes) was an aviation student from a local technical college.  This is their most expensive program and tuition expenses for 2018 were over $36k; scholarships that year were a little over $5.2K.  Obviously, we topped out on the American Opportunity and the scholarships were not really an issue.

In 2019, he graduated with an Associates Degree.  He then moved on to our local state university and continued his education as a half-time student.  He did have five months as a fulltime student, and he should have had a semester’s ($18k) worth of tuition.  However, when our 1098Ts arrived, they only showed a total of $2,869 tuition, but with a total of $4,220 scholarships.  Hence, the $0 tax credit.

By the way, when I mistakenly posted elsewhere (they suggested that I make a new post), the question come up about whether we had a 529.  There is no 529 involved here.

He actually paid out $18k for the Spring 2019 semester, but I’m guessing that got put into 2018.  Either because that’s when it got paid, or perhaps that’s when the student loan went in.

TT correctly said that the excess scholarship money would become taxable income to our son. He will have w2 income and would have to file anyway. 

In looking at https://ttlc.intuit.com/community/taxes/discussion/i-claim-my-son-as-a-dependent-he-has-a-taxable-sc... ( I mistakenly put a reply there and it really didn’t fit, so I am posting fresh here)

I found a post by woodlore in which they quote Pub 970 and I quote in part;” Publication 970 for 2015, in two separate sections discussing coordination with Pell grants and other scholarships (pages 15 and 26), suggests "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."  Also this: "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."

I figured out how to enter it as non-qualified on his taxes, (answer "Yes" to the question about paying room and board with a scholarship and put $4,220 in).  And it seems that I would do the same on my taxes in TT.

My questions are this:

• Can I make the scholarship as paying non-qualified expenses? I seem to recall a previous tax preparer asking this type of question about our oldest son when he was in college.  And how do I know if the scholarship/grant can cover room and board?
• Do I need to substantiate the conversion to non-qualified expenses? If so, how?  He didn’t stay in the dorm, but lived with us.  So there isn’t a statement from the school for room and board.
• Assuming that I _can_ do this, am I doing it correctly in TT?
• Would doing this trigger some kind of action by the IRS.
• Lastly, in regards to the Spring 2019 tuition somehow having been paid in 2018, is there some way to make that change so that tuition exceeds the scholarships. I also saw something somewhere that a scholarship could be somehow applied to a previous year, if it was supposed to be for the previous year expenses.  But how would one do that?

I’m sorry for the length of this, but this became complicated really quick.  I’ve been totally blind-sided by this and I didn’t account for it in our estimated payments, so if I can’t figure this out, we’re on the hook for $2,500.00

Thank you for any help that you can give.

[KathrynG3]

No, not necessarily regarding the tuition being allocated to 2018--this exception would apply to your son's situation, too. This is assuming that the total tuition less scholarships was greater than the $4,000 of education expenses for 2018 that would have resulted in the 2018 American Opportunity Tax Credit. The amounts spent for tuition for the spring term would likely be unused.

If that is true in your scenario, then the tuition for the Spring could be used in 2019 even though it was paid in 2018.

Please see IRS Publication 970, Table 2.1 page 15 that states "If you pay qualified education expenses in both 2019 and 2020 for an academic period that begins in the first 3 months of 2020 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2020 instead of reducing your expenses for 2019." Please note this is contradicted earlier on page 14.

Your questions:

1. Yes, you can use non-qualified education expenses.

page 16 of Publication 970 "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."

2. Use a spreadsheet to document your treatment of expenses and save for your records with the tax returns.

3. Unfortunately, we cannot see your tax return in this forum. However, you are welcome to call in and either ask a question or submit for an offline review to confirm your entries. I recommend citing the Publication and page number in the initial correspondence

4. No. The steps are outlined by the IRS 

5. During the interview process in entering the 1098-T, a series of questions are asked. When it is complete, you will have a section entitled Here's Your Education Summary. During the interview and after there will be timing questions and dollar amount questions to capture the details you are asking about. 

Also, here are some tips for Form 1098-T entering from TurboTax Expert KittyM:

STEP 1.) It will skip to books and supplies. KEEP GOING. You can't jump to, you can't hit back KEEP GOING as though you have entered.
STEP 2.) Do NOT put in scholarship amounts when it asks if the scholarship is listed on Box 5 of the 1098-T because you are about to double up. KEEP Going. you are about to circle back.
STEP 3.) Go through all screens. If says can't maximize because no expenses do not fret, Go all the way until it circles back to the Wages and Income screen.
STEP 4.) Go back into Education credit and hit Edit on the student. Will ask if you had education credit.
STEP 5) Once you do you may see the Summary Page of the student. Hit edit on the top one that reads Tuition.
Step 6.) Will ask if you had a 1098-T you say yes, and THERE is the 1098-T

[videot7]

Thank you, Kathryn.

I believe this is the kind of information that I needed.

I see what you mean when you say that table 2.1 on page 15 is contradicted on page 14.  It seems as if the tip on page 15 is referring to refunds from the school from a previous year reducing the credit you can take this year, if you have already filed a return.  So that does not apply to me if that's what it means.  However, page 14's statement ,

"Qualified education expenses paid
in 2019 for an academic period that begins in the first 3
months of 2020 can be used in figuring an education
credit for 2019 only."

That seems to specifically forbid what I am talking about in Question 5.

However, the rest of your reply is indeed good news! 

Thank you so much!

[videot7]

OP here:

Is it a problem that I do not know if the scholarships/grants were for qualified expenses or if they can be used for non-qualified expenses?  If I do need to know this, how can I find this out?

Thanks again,

Videot

[VictorW9]

You should have received a 1099-Q detailing payments from qualified educational programs.If you withdraw more than the qualified education expenses, the excess is a non-qualified distribution. The principal amount will not be subject to tax but the earnings if part of the distribution will be taxed.

[videot7]

Isn't 1099Q for Coverdell or 529 accounts?  Neither one of these is involved in this case. 

What I am asking about here is scholarship and grant money reported on a 1098-T.  In the context of this thread given above, we will reporting it as having gone to non-qualified expenses so that we can claim the tuition with AOTC. 

But my question is:  Is it a problem as far as the IRS is concerned, if we don't know if the scholarships are for qualified or non-qualified expenses?  How would I find out if we do need to know?

Thanks again,

Videot

[VictorW9]

@videot7. Got your point. I did misread your question and thought their was a distribution aspect to your question. The amounts reported on IRS form 1098-T are a guide that can help you figure out the taxable portion of your scholarships, grants and fellowships, but not necessarily a definitive answer. So, you can modify this amount and transfer it to room and board and just enter the scholarship amount you deemed was against tuition. You may have to keep receipts of the actual amounts of related expenses and actual tuition in the unfortunate event the IRS were to ask to see evidence in support of your deduction. A possibility not uncommon.