Education Credit and 1099-Q

[StevenL]

Clients daughter has tuition expenses for $35,133.00 (after grants and scholarships). Client receive 1099-Q with $9,300 in gross distribution. Can he still claim the Education Credit?

 

Thanks for your help.

[Terry D EA]

If all of the tuition and fees were paid from scholarships and grants, then the answer is no and the amount of the distribution was used to pay the remainder then the answer is still no. If the amount of the distribution was used entirely on education then the difference is taxable income. If there was excess over and above the scholarships, grants and 1099Q distribution then the answer would be may be from your post it doesn't sound as if this were the case.

[Lion EA]

Why not, Terry?  After using $9,300 of tuition to keep the 1099-Q non taxable, don't they still have nearly $26,000 tuition left for an Education Credit?  (Although, if they can afford over $35,000 in tuition, their income may be too high to qualify for credits.  But, maybe they use loans to pay the tuition.)

[Gail in Virginia]

Terry, I read the post completely differently.  I think what Steven was saying was that, after deducting scholarships and grants, the amount of tuition and fees was STILL $35,133.  The 1099Q shows $9,300 which would reduce the amount paid out of non-scholarship, non-tax deferred funds to $25,833.  Which would leave plenty of expenses for AOC.

[StevenL]

Thanks for the replies. The total tuition was $45,233.00 (Fordham University), There was scholarships and grants totally $10,100.00, plus 1099-Q gross distribution of $9,300 so I agree with Gail that there is plenty of expenses left over for AOC. I just wanted to be sure. BTW: they're not eligible for the full AOC, due to income, but they will get a portion of it and with that kind of tuition every little bit helps!! 

[Randall]

I would use dollars for AOC first assuming income is low enough for eligibility. Then excess cost including room and board for the 1099Q dollars. Also, poster said $9300 was gross distribution. How much was reported as earnings? Only the earnings would be subject to tax if not enough dollars to offset. It sounds like there's plenty of cost dollars to apply to both.

[Terry D EA]

Holy Cow!! I read that wrong. Please accept my apologies. I didn't see the fact the 35K was after the scholarships. So, the others are correct and I agree with Randall in starting with the AOC and looking at the income to see if they qualify. Can I use the excuse of being really tired and can't wait until Wednesday?

[Hahn1040]

also take into consideration that 1099Q money (529s etc) can be used for room and board

of course those are not qualifying education expenses for the AO credit, but one can use 1099Q $$ for room and board and save tuition for the credits

the 1098-T does not include any room and board because they are not qualified expenses for AO or LL or deduction

but you CAN use 1099Q $$ for room and board

 

of course, there is no real way of reporting what you did with the 1099Q $$ so I tell my clients to put all of their receipts/records/documentation in the file NOW

so that in 18 months when they get the letter form IRS asking about the 1099Q $$$ they have all of the support ready to send to IRS 

[HV Ken]

@Hahn1040 - I include a cover letter and scan and attach the supporting documents into a PDF file and attach it to the efile when the 1099-Q vs. 1098-T gives the impression that the earnings may be taxable.  Have never gotten a letter from the IRS once I started doing this.  Previously, we would wait for the letter and then send the stuff in. 

[Cathy]

Terry,

Even if the earnings were enough to pay for all of the educational expenses, taxpayer can choose to have some of the earnings reported as income and then use the expenses qualifying for the AOC as an education credit. The AOC is at 100% of the first $2k, etc.. while the income that is taxed is taxed at either 0, 15, 25%, etc... The thing to remember is that the taxpayer cannot do both: exclude as income the earnings on the QTP that paid for expenses that qualified for the AOC and then use those same excluded earnings for the AOC.