Room and Boarding charges - Studying from home

[kgraghu]

My son studied college in 2021 from home due to covid. Can I claim food costs of $4,000 under "Room and Boarding" to get the American opportunity tax credit of $2500? I understand that he has to pay taxes for an unearned income of $4,000.

[Bsch4477]

Room and board costs are not qualified expenses for the American Opportunity Credit but are allowed under the 529 plan if you have one. 

[kgraghu]

Turbo Tax will consider up to $4,000 of room and boarding charges for the American Opportunity Tax credit calculation if you say that you spend money from your son's qualified scholarship to cover that cost.

[Hal_Al]

@kgraghu  said "Turbo Tax will consider up to $4,000 of room and boarding charges for the American Opportunity Tax credit calculation if you say that you spend money from your son's qualified scholarship to cover that cost."

Not exactly, but essentially yes. Room and board are not qualifed expenses for the AOC. You're using a known tax loop hole.  Scholarships are tax free, to the student, if he uses it for qualified expenses (tuituon, fees and books and other course materials). Scholarships used for other living expenses are taxable income.  Usually, you can "elect" to treat his scholarship as taxable income (on his return), so that you (the parent) can claim the AOC on your return.

There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this  if the conditions of the grant are that it be used to pay for qualified expenses ( this may be indicated by the school’s billing statement specifically showing the scholarships being applied to tuition).

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.

The way you enter this in TurboTax (TT), when asked if any of the scholarship paid for room & board, in the parent’s interview, enter $6000 (in the 1st  example above).

So, yes, essentially you can claim food (or any other non "qualified") costs of $4,000 under "Room and Board".  

[Bsch4477]

To be clear, as @Hal_Al wrote you can have any scholarship be taxed as income to the student and then the parent can claim American Opportunity Credit based on qualified education expenses BUT room and board are NOT qualified education expenses for AOC. 

[kgraghu]

Thank you. I have been doing this in my past returns. In 2021, the room and boarding charges were very less since my son studied most of the time from home due to Covid. Hence, the scholarship money covered both the qualified and room & boarding charges. So, I didn't pay any additional amount to the college. Is that ok to claim that I spend $4,000 out of pocket on food and other expenses while he was studying from home to claim the American Opportunity Tax credit?

[Bsch4477]

If you spent his scholarship money on room and board then you are free to use any qualified education expenses such as tuition and books to claim the AOC. But as I wrote before, his room and board expenses are not qualified expenses for claiming that credit. 

[Mike9241]

a student may choose whether to allocate scholarships to tuition, fees and course related materials or to living expenses when filing a return. allocating to tuition and fees may reduce the education credit. by allocating to living expenses (room and board) the scholarship becomes taxable so it does not reduce the amount of expenses eligible for the credit.  room and board is never an eligible expense even if the scholarship is treated as non-taxable 

[Hal_Al · Accepted solution]

Q.  Is that ok to claim that I spend $4,000 out of pocket on food and other expenses while he was studying from home to claim the American Opportunity Tax credit?

A. Simple answer: Yes,  to getTurboTax to do what you want. 

But, that's not what's really happening.  It doesn't really matter if you "spent" anything. All that matters is that $4000 of qualifed expenses was not covered by tax free scholarship. 

Taking the above example a step further. Student has $10,000 in box 5 of the 1098-T and $8000 in box 1 (tuition), and no other expenses to enter.  After entering the 1098-T, you will be asked if any of the scholarship was used for room & board.  Answer yes. When asked how much was used for R&B, answer $6000.  That will free up $4000 of tuition to be used for the AOC*.  TurboTax claims the AOC, automatically, based on those simple entries. The student reports $6000 of taxable income on his return.**

*$10,000 scholarship minus $6000 allocated to R&B = $4000 scholarship allocated to tuition.

  $8000 Tuition (box 1) minus $4000 coverd by tax free scholarship = $4000 tuition can be claimed for the AOC

**Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the  $12,400 filing requirement and the dependent standard deduction calculation (earned income + $350)..  It is not earned income for the kiddie tax and other purposes (EIC, IRA contributions, etc).  So, if that $6000 is the student's only income, not tax will be due.  He does not even need to file a tax return. But, you may want him to do so to document that he reported the income. 

[kgraghu]

Champ - ok, thank you for the detailed emails.  I am not saying that the room and boarding charges will be considered for AOC.  The question is, Is R&B cost applicable when the student studied from his/her parent's home? 

[Bsch4477 · Accepted solution]

What you are doing by saying that you are using up his scholarship money by paying for room and board is making the scholarship taxable. But in reality you could say you used it to by a car or any other non qualified expense. Once you have made the scholarship taxable you are then free to use qualified education expenses such as tuition and books for AOC credit. 

[kgraghu]

Thank you very much to everyone for your response and clarifications.