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Check my thinking on AOTC please


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OK, I'm having a senior moment of some kind here.

A client has a 1098-T for their kid in the local community college. Block 2 (Qualified Expenses) is around $ 900. Block 5 (Scholarships and Grants) is about $ 2,200. Kid is in third year of college and attends enough so that the "at least half time student" block is checked.

I say no AOTC because the scholarships/grants is more than the expense. Am I right? These scholarship / grants are non-taxable.

Thanks in advance.

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If the student takes the scholarship as taxable, does she have a tax liability?  Does it save the parents any tax to take the AOC?  Run the numbers to see what gives the family as a whole the lowest tax liability.  Let your client decide if they want the best outcome for the parents or the family unit.

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1 hour ago, Lion EA said:

If the student takes the scholarship as taxable, does she have a tax liability 

Doesn't the scholarship have to be unrestricted allowing you to apply the scholarship toward non qualifying expenses for you to do this ?

Be sure to find out how much was spent for books and materials, which in some cases could include a computer.

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Several things to consider:

  • AOTC can only be taken 4 times per student.  Since this is community college with very little qualified expense, it may be beneficial to wait and take it later when tuition etc. are enough to get more of the credit.  of course, part of this consideration is:  Will the parent's income be too high to take it in another couple of years... in that case $900 now is better than zero later...
  • You have to look at the actual payment history to see what was paid when.  This could be a case that the scholarship was paid in 2017 but was for a course billed /paid in 2016 that had been reflected on the 2016 1098-T
  • If scholarship is truly greater than tuition expense, then it is taxable to the student. (Don't rely on the 1098-T-  look at the record of payments!)  In many cases this is moot because it would not cause tax liability to the student.  Scholarship goes on line 7 of the 1040.    e.g.  If student has $2,200 taxable scholarship and $3,000 W-2 wages and $10 bank interest.   This is still below the standard deduction, so no tax liability for the student.  I have a client who's daughter has 100% scholarship for college:  tuition, room , board, even football tickets, plus another $10-$15,000 scholarships from other local places.  I asked:  Since her expenses are fully paid where does the rest of the scholarship $$ go: Dad's reply: "They give it to her in cash"  She has quite the tax liability!  He is happy to pay the tax. 
  • See Pub 970 starting on page 15: Coordination with Pell grants and other scholarships.  for detailed explanation of taxing the scholarship for student in order to free up the tuition expense for the parent.
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>>>>>If scholarship is truly greater than tuition expense, then it is taxable to the student. (Don't rely on the 1098-T-  look at the record of payments!)  In many cases this is moot because it would not cause tax liability to the student.<<<<<<<<<

The amount taxable would be the portion of the scholarship that was not used for educational purposes. Example; if the student used the funds for room and board, those funds would be taxable. Normally, this doesn't happen in a community college. I do agree, however, to not rely on the 1098T. Also, it is noteworthy that the taxability of the scholarship depends on the scholarship. 

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Just a thought.  Are you sure the numbers are for 2017 only.  Ive had 1098-Ts that pull in other years info such as scholarship info for 2017 and the first semester of 2018 which could create a taxable situation.  I usually like to get the term printouts from the school to be sure they are only allocating the correct year items to the 1098-T

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23 hours ago, Terry D said:

Don't rely on the 1098-T

This is the key.  Always get a report from the Bursar's Office.  And then a list from the parents of who paid what, and when.  Remember, payments by Grandma don't count towards AOTC.  Unless the kid is Grandma's dependent...

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On ‎2‎/‎2‎/‎2018 at 12:11 PM, Lion EA said:

If the student takes the scholarship as taxable, does she have a tax liability?  Does it save the parents any tax to take the AOC?  Run the numbers to see what gives the family as a whole the lowest tax liability.  Let your client decide if they want the best outcome for the parents or the family unit.

Education credits follow the exemption (at least until 2017). There is no room for negotiation when it comes to the exemption so no need to compare who will get the most benefit.

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If the parents can take the student's dependency exemption, but do not, then the student cannot take his own exemption, but is able to take the nondeductible part of AOC if qualified.  You do need to run the numbers to see what gives the best result for your clients.  In the OP, there would not be any AOC for anyone unless the student can use the scholarship for items not eligible (I've had students who were refunded the excess scholarship funds by their colleges); then it could matter whether or not the parents claim the student.

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19 hours ago, Lion EA said:

If the parents can take the student's dependency exemption, but do not, then the student cannot take his own exemption, but is able to take the nondeductible part of AOC if qualified.  You do need to run the numbers to see what gives the best result for your clients.  In the OP, there would not be any AOC for anyone unless the student can use the scholarship for items not eligible (I've had students who were refunded the excess scholarship funds by their colleges); then it could matter whether or not the parents claim the student.

You don't qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.
1.
You were:
a.
Under age 18 at the end of 2017, or
b.
Age 18 at the end of 2017 and your earned in-come (defined below) was less than one-half of your support (defined below), or
c.
Over age 18 and under age 24 at the end of 2017 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).
2.
At least one of your parents was alive at the end of 2017.
3.
You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2017. END QUOTE

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I typed "nondeductible" in error when I meant "nonrefundable."  A student who can be claimed by his parents cannot get the refundable AOC, but he can get the nonrefundable AOC if his parents do not claim him.  Again, this doesn't appear to be the OP scenario, but it is something to keep in mind as we prepare returns for our clients and their college students.

If the parents can take the student's dependency exemption, but do not, then the student cannot take his own exemption, but is able to take the nonrefundable [nondeductible = typo] part of AOC if qualified.

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Exactly right Lion.  I doubt the student claiming $1100 of taxable income will cost more than the parents forgoing the exemption though.  As others have said, try it both ways.  I for one would never claim the AOC for $900.  It can only be taken four times, and maybe the student will go on to another college where tuition is at least $4k and will get the full credit.  Don't waste it on $900.

How would folks handle this one I had today?  Student has full scholarship.  1098T shows about $10k in scholarships and grants.  Amount billed is there but as we all know useless.  Amount paid is zero because scholarships paid the whole thing.  When I enter just the $10k, it comes up as taxable income because nothing was paid.  I am thinking of just not filling out the 8863.  Or should I put in the "amount billed," which is more than the scholarship amount, and just not calculate the credit?  I have the bursar's record and there is the usual amount billed in one calendar year and the scholarship paid in Jan the following year, but the point is that all the scholarship money went for tuition and the student paid nothing.  Should I do an 8863, and if so how to fill it out?

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