TurboTax won't allow me to pick American Opportunity Credit vs. Lifetime Learning Credit, but the distinction matters!

[dnfrieden]

The feature where TurboTax picks the appropriate Education Credit for you (American Opportunity vs. Lifetime Learning) fails to pick the correct one needed in this very specific situation, which you can recreate with the following scenario:

College-age child's return:

• Could be considered a dependent on parents' tax form, but will not be
• Meets all requirements for both credits (although doesn't meet "support" test required for refundable portion of AOC credit)
• Has plenty of 1098-T tuition expense (even after adjusted for tax-free scholarship grants) to qualify for full amount of either credit, but
• Has an income low enough that she only qualifies for an education credit of $1,080 regardless of which credit is chosen (AOC vs. LLC)... any additional credit would push her into refundable territory which she doesn't qualify for.

In this scenario, TurboTax says either credit is available to her and worth the same amount ($1,080), and then it chooses the LLC.  And it doesn't let the user override this choice.  But this choice of LLC (instead of AOC) causes problems in the parents' return related to their 529 plan (i.e. Qualified Tuition Program, QTP) withdrawals.

Parents' Return:

• The college age child is not listed as a dependent
• Parents withdrew $26,000 from 529 Plan as indicated on parent's 1099-Q (where "recipient" is the parent)
• In the math necessary for ensuring "No Double Benefit" (Pub 970, p. 14) and for ensuring proper "Coordination With American Opportunity Credit" (Pub 970, p. 52), the parents must use the following number that comes from the child's tax return:  "Expenses taken into account in figuring education credit", which is Form 8863, Line 27 (for AOC) or Form 8863, Line 31 (for LLC)
• The following is the rules for computing the credit from the qualified expenses for the two credits:
  • AOC:  100% of first $2,000 (of qualified expenses), then 25% of next $2,000
  • LLC:  20% of the first $10,000 with maximum credit of $2,000 per return.
• Using the above rules, with the AOC, the "expense taken into account in figuring the education credit" would be $1,080.  Whereas with the LLC, it would be 5 times larger, which is:  $5,400

Now consider the math:

If the child uses the AOC, the parents' math related to the permissible tax-free withdrawal of their 529 account is:

•                 $40,000  - Total Qualified Education Expenses
• (minus)   $12,920 - Tax-free scholarships
• (minus)   $ 1,080   - Expenses taken into account in figuring AOC
• (equals)  $26,000  - Maximum amount you can withdraw from 529 tax-free

And in this situation, their entire $26,000 withdrawal is tax-free.  This is why the parents want for the child to use the AOC credit.

Now, consider what happens when TurboTax is forcing the child to use the LLC credit (as is currently the case)

•                 $40,000  - Total Qualified Education Expenses
• (minus)   $12,920 - Tax-free scholarships
• (minus)   $ 5,400   - Expenses taken into account in figuring LLC
• (equals)  $21,680  - Maximum amount you can withdraw from 529 tax-free

And in this case, only $21,680 of the parents' $26,000 withdrawal would be tax free.  Which would force them to pay taxes on $4,320 of that withdrawal.

This is why I consider this a bug.  By not letting the child choose the AOC over the LLC, the parents would be forced to pay more in taxes.

Please eliminate this bug so that I can continue to use TurboTax to do our taxes.  The bug fix should technically consist of two things:  1)  Letting the user specify they wish to use the AOC in this scenario, and 2) Ensuring that the user has the ability to control what ultimately goes into Form 8863, Line 27.  The user should be allowed to put a value less than $4,000 (i.e. $1,080 in my example) even if they have $4,000 (or more) worth of expenses.

[ThomasM125]

I understand what you mean but I'm not sure about the logistics or time frame for making changes to the program. In the mean time, you can try changing your response to the question regarding being enrolled at least half time or having taken the American Opportunity Credit for four years, a "no" answer to the first question and "yes" to the second will force the lifetime learning credit to apply. Those answers do not appear on the tax return, they are just used to determine which credit you will take.

[dnfrieden]

@ThomasM125 Thanks for the quick response, and for acknowledging that I've identified a problem with the software.  I like your idea of searching for a work-around in the meantime, but unfortunately, I'm trying to force it to pick the AOC (not the LLC like your suggestions would accomplish).  Since the AOC is the credit with far more restrictions / qualifications regarding its use than the LLC, there doesn't appear to be any questions I can answer in Turbo tax that would disqualify me for the LLC but leave me qualified for the AOC.

Do you have any other ideas for how I can proceed?  If my only option is to have TurboTax fix the problem, how do we start that process?  Can you submit a bug request based on the information I've provided and generate some sort of case number?  I'm hoping to start whatever official process TurboTax has for getting things fixed that prevent me from using the product.  I feel it's a fair request since I already purchased the product but am now unable to use it.  Thanks!

[AmyC]

If you entered the 1099Q, remove it from the program as it should not be entered when all of it is used on qualified expenses. Inputting the Q in the wrong order can also cause an issue.

The parents need to claim the child to claim the AOTC. This leaves that you are trying to have your child qualify for the AOTC and are aware of the rules and have listed them. Please see another post of mine here to maybe help clear the confusion.

If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form. Tuition paid for the first 3 months of the next year also qualify, see page 12, What Expenses Qualify, and page 52 for qualified distributions at IRS Publication 970, Tax Benefits for Education.

[dnfrieden]

@AmyC Thanks for commenting and sharing your previous posts.  Unfortunately, this doesn't address the issue.  Just to clarify, I'm only struggling with TurboTax on my daughter's return.  I am not claiming her as a dependent, and she is the one trying to get the AOTC credit (instead of the LLC credit).  Further, on her tax return, we have not submitted a 1099-Q.  If that were to be submitted, it would be submitted on my tax return (since I am the "recipient").  All of the 1099-Q  expenses are indeed qualified, so it sounds like I don't need to use it on my parent return (which makes sense to me).  But I'm not struggling with the parent return.  The parent return does what it needs to even if I submit the 1099-Q because I'm able to provide all my expenses and convince TurboTax that they're all qualified.

My issue is that turbo-tax correctly determines that my daughter qualifies for both the AOTC and the LLC, correctly determines that each is worth the same amount ($1,080) for her particular tax situation, but incorrectly forces her to pick the LLC when we need to pick the AOTC.  The reason we need to pick the AOTC is explained in my original post.  Hopefully you can still help me out with this additional clarification.  Thanks!

[AmyC]

I understand your thinking but the big picture is how the IRS views this. They will look at each return on its own. It does not matter which credit is on her return. 

• The money you withdrew is not being included in either tax return as income. 
• The parents return is safe with nothing education related on the return. f the IRS were to ask you about the 1099-Q, you would provide the expenses covered. The IRS is not cross referencing the returns for these calculations. It only matters that the money went to room and board, books, tuition, etc.
• The child's tax return can claim either credit without it affecting the parents return.  When the Q is entered before the tuition is entered, it will automatically pull out the money for the LLC. If you remove it, there should not be a problem.

My concern is that she is not eligible for either credit if someone CAN claim her. See Compare Education Credits.

[dnfrieden]

@AmyC Thank you for the big picture perspective you shared.  Regarding your third bullet, are you saying that you still think there's a way I can get TurboTax to use the AOC for my daughters' return (if I wanted to) in her particular scenario?  Or are you saying that there isn't really a way to do this, but that I shouldn't worry when considering the big picture?  If there is a way, I still haven't found it.

Regarding your concern about not being eligible for either credit if someone CAN claim her.  I too saw that statement in the comparison table and it contradicted what I saw in the 2022 version (since the 2023 version isn't yet available) of Publication 970:

• https://www.irs.gov/pub/irs-pdf/p970.pdf

For example, on Page 12, it says you cannot claim the AOTC if "you are claimed as a dependent on another person's tax return".  And in Figure 2-1 on Page 13, the flowchart says "Are you listed as a dependent on another person’s tax return?"

So clearly the wording in the 2022 Publication 970 document suggests it's not about whether you CAN claim her, but whether you DO claim her.  Do you know if something has changed for 2023?  I figured I'd wait for the 2023 version of Publication 970 to come out to see if there's still a discrepancy or not.  Thanks!

[AmyC]

If you delete all of the education items and the 1099-Q to go back to ground zero and start again, leaving the Q out of the picture, you should get the AOTC. The 1099-Q goes in and hogs the $10,000 waiting for LLC I understand why it is necessary but it forces us to work around it.

I added the note with can as a precaution which is exactly how you took it. Until things are finalized, we can only be prepared either way. 

You can always challenge a ruling by filing a disclosure of position with your return. You have to mail it in with your position and you have to believe you have a fairly good chance of winning. See About Form 8275, Disclosure Statement - IRS.

[Hal_Al · Accepted solution]

Type letme (no space between let & me) in the search box. Then press enter. Then  click  on the link "jump to letme''. 

TT will give you the option to select the other tuition  credit

Another possibility: TT is just using the wrong amount of expenses. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.

[Hal_Al]

It sounds like you've got a good game plan there, based on the limited info provided.

Technically there is a provision that allows a student-dependent to claim a federal tuition credit. But, from a practical standpoint it seldom works out.  You appear to have  case where it does work.  A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable).

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• If not, does he/she qualify as a dependent
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B on campus charge. If he lives at home, the school’s R&B “allowance for cost of attendance” for student living with parents.
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student?
• Is the student a degree candidate attending school half time or more?

[dnfrieden]

Thank you @Hal_Al.  This is exactly what I was looking for, and it worked perfectly.  I used your "letme" trick and I was able to override the LLC choice that TurboTax made and was able to chose the AOTC instead.  This completely solves my issue.  As to your second comment, I think I'm comfortable with all the other aspects of the education tax credits so I won't answer your more detailed questionnaire at the moment, but I appreciate your willingness to help there too.  I might fill it out in the future if I'm stumped on something.  Thanks again!

[dnfrieden]

Thank you @AmyC for your help.  The "letme" trick that @Hal_Al just mentioned ended up being the one that worked for me.  Thanks too for clarifying about my other questions.  I'm all good now, and I'll take a look about that disclosure statement just because it sounds interesting.  Appreciate the help!