Why is turbotax giving me AOTC when my son's scholarship was more than qualified expenses? What am I doing wrong?

[429freckles]

I was expecting TurboTax (Premier) to tell me that I did NOT qualify for ANY education credits. Now I'm confused.

My son's 1098-T box 1 (qualified tuition & related expenses was $27,310 box 5 (scholarships & grants) was $33,646. The program asked if any scholarships were used to pay for room & board my answer was "yes" -- Total used? $6,336 (entire remainder of the scholarship) -- incidentally, I did kick in another $600 towards R&B that wasn't covered by scholarships but that's not irrelevant to my problem as I understand that to be my part of his nonqualified expenses (along with air travel to school & incidentals) 

At this point, (on the next screen) TurboTax tells me that my son will need to include the $6,336 amount as taxable income. (I expected that) The very next screen, asks if my son paid anything for books, supplies & equipment to attend. I answered "yes" to this because I paid cash for his books $493 (not required to be purchased from the college bookstore-- why that matters is beyond me, but ok)  

The list of deductions came up  -- "Yes" to American Opportunity Credit. "NO" to Lifetime Learning Credit AND Tuition & Fees Deduction (Net qualified expenses equal zero on both) AGAIN, somehow I was expecting all 3 to be "NO" instead I was awarded a AOTC credit of $219.

As I move onto my son's return, is there something I need to do differently? It appears that the same questions are being asked even though he's a dependent on my return & as such, I understand he ultimately won't qualify for the credits. BUT?? With the $493 entered for books will the $6336 be reduced income? Would that outcome be right or wrong? Other relevant info -- He did NOT support himself but he does have work-study & part-time summer income of $3,000. He's 19 yrs old, & a freshman. I will be claiming earned income tax credit on him as a qualifying child. I normally wouldn't be too concerned about $219 but I fear the IRS (no joke) 

I just want it to be done right! Maybe I should remove the educational part off my return? At this point I am confusing myself. Any answer to help clear my fog is deeply appreciated.

[KrisD · Accepted solution]

Since you have the desktop version, switch to Forms (top right hand side) and look at the 8863 and the student worksheet to see what numbers the program is using. 

(Online program look at "Preview my 1040")

The 1098-T (and 1099-Q) are informational tax forms use to calculate credits and/or income. As the parent of a dependent student, when you enter the 1098-T on your return, your return will tell you what the student needs to report and how to report it. You do not re-enter the 1098-T on the student's return all over again. Below are directions the dependent student uses to report the income.

Credits are only based on tuition & fees (reported on the 1098-T)  and books and supplies (entered by you) ( the AOTC uses all books and supplies, Lifetime Learners Credit only uses books required to be purchased from the school).

Scholarships can be applied to the expenses listed above and therefor be non-taxable, OR to Room & Board which makes that portion taxable. Since you added 600 to the room and board, you could allocate 6936 scholarship to Room & Board if desired. That would make more expenses available towards the credit on your return. 

AFTER you work it through on your return (by the way, there are no "my part of his expenses", you group all expenses to the one student, no matter who pays) you report his taxable scholarship income (if any) on his return.

I did a mock up and entered only 493 as expenses, It gave me the American Opportunity Tax Credit and was split as partially non-refundable (lowers tax, goes to 1040 line 12b $296) and partially refundable (any remainder of the credit on 1040 line 17 $197). How the credit affects your return depends on your income and tax liability. 

Read IRS Pub 970 for more information and great sample examples. Also, compare the 1098-T to your student's account statement to verify that the school reported everything properly.

CLICK HERE for IRS Pub 970 Tax Benefits for Education

FOR THE STUDENT TO REPORT THE TAXABLE SCHOLARSHIP INCOME: 

• Sign into your account, your return and click “Pick up where I eft off” 
• Click Federal
• Click Wages & Income
• Scroll down to “Less Common Income” (THE LAST SECTION)  (online click Show more)
• Scroll down to “Miscellaneous Income, 1099-A, 1099-C” (THE LAST SECTION) and click Start
• Scroll down to “Other reportable income” (THE LAST SECTION) and click Start
• Continue to the “Other taxable Income Screen” and type SCH as the description and enter the amount
• Click Continue
• If the “Other Miscellaneous Income Summary” screen looks good, click Done

[429freckles]

Thank you so much for your reply!  I feel much more confident about what I have within my return now. BTW, I didn't realize that I could add the $600 to make more expenses available towards the credit. Every little bit helps. Cheers & thanks again KrisD -- You are a TurboTax treasure!!  

[KrisD]

Thank you for using TurboTax.