American Opportunity Credit

[Christian]

A client has come in with his Form 1098-T his daughter having entered college in September of last year. His tuition expense was some $4,200.00 which was covered by a scholarship his daughter received of some $6,400. He is paying some $400 monthly for room and board. The amount by which the scholarship exceeds the tuition is my question. Is it considered taxable income. I have been reviewing the relavent IRS material on the credit but have not resolved this as yet. 

[Lee B]

You can only get the AOC for 4 years so if it's her first year in college I would take the Tuition & Fees Deduction,

saving the AOC for years with multiple quarters and or semesters.

[Lee B]

21 minutes ago, cbslee said:

You can only get the AOC for 4 years so if it's her first year in college I would take the Tuition & Fees Deduction,

saving the AOC for years with multiple quarters and or semesters.

Sorry, I didn't read your post closely enough.

[EricF]

You can choose to make some or all of the scholarship taxable to the student.  This would leave the tuition available for the parents to take the full AOTC.  The scholarship income is considered earned income that can increase her standard deduction and result in zero taxable income.

[Christian]

How does one make this election as the daughter had no income in which case a filed return would indicate no tax due unless the full amount is allocated to the daughter? I am unfamiliar with this provision of the credit.

[EricF]

There's no election.  You just do it.  See page 16 of Publication 970.

[Christian]

If I include the entire scholarship in dad's income the resulting credit produces a much higher refund. If memory serves me this is allowed. I am thinking it would be entered on the other income line of the Form 1040.

[Christian]

That may not be correct. I am listening to the impeachment hearing and mulling tax problem at the same time. I have figured that no credit or or additional tax is due since the scholarship amount in excess of the tuition was used for fees, books, and instruction materials. However this leaves a question as to the legality of simply adding the full amount of the scholarship into the parent's income. I seldom encounter a payment of a scholarship in excess of the tuition charged by the college hence my concerns to get it correct.  

 

 

 

 

[Sara EA]

You add it to the student's income, not the parent's.  However, since it was all used for qualifying expenses you can just use $2200 as qualifying education expenses or whatever was spent (make sure you see receipts).  I second cbslee's suggestion to just take the tuition and fees or Lifetime credit this year and save the AOC for years when expenses are higher.

[Terry D EA]

2 hours ago, Christian said:

A client has come in with his Form 1098-T his daughter having entered college in September of last year. His tuition expense was some $4,200.00 which was covered by a scholarship his daughter received of some $6,400. He is paying some $400 monthly for room and board. The amount by which the scholarship exceeds the tuition is my question. Is it considered taxable income. I have been reviewing the relavent IRS material on the credit but have not resolved this as yet. 

I'm going to respectfully disagree with some of the responses. First, any funds received from a scholarship that exceed the qualified expenses is taxable income plain and simple. You said the student received $6400.00, $4200.00 is for tuition, then $2200.00 is taxable income. You may need to know exactly what the scholarship was for. Room and board are not qualified education expenses. FYI- The tuition and fees deduction is not available for TY 2019. so you can't use that anyway. Also, if there is proof the remaining funds were spent on qualified expenses, then the excess spent on those fees is not taxable. If a balance still remains, then it is taxable income.

55 minutes ago, Christian said:

If I include the entire scholarship in dad's income the resulting credit produces a much higher refund. If memory serves me this is allowed. I am thinking it would be entered on the other income line of the Form 1040.

I would not do this. If the dad is claiming the daughter as a dependent (she has to be under 24) then he can take any tax credit he qualifies for. The only portion of the scholarship that would go into the dad's income is the amount NOT spent on qualified educations expenses.

I would suggest contacting the bursar's office of the college and obtaining a print out of ALL of the fees charged for the academic year. This is your only proof of exactly what was charged and paid as well as where the payment came from. The only way I would take what the client is telling me is if they produced receipts. I have had two or three client's returns questioned by the IRS for additional information to substantiate the credit claimed so be careful and CYA. I require every client who will be claiming or think they will be claiming the education credits to bring a printout from the bursar's office. 

2 hours ago, EricF said:

You can choose to make some or all of the scholarship taxable to the student.  This would leave the tuition available for the parents to take the full AOTC.  The scholarship income is considered earned income that can increase her standard deduction and result in zero taxable income.

This bothers me a bit. While it seems legit, I still question it. First, doing so could trigger a balance due for the student. Yes, the parents would get the full AOTC. Remember that is limited to $2500.00. Would the benefit outweigh the tax? Also, would mom and dad be willing to help the daughter with her tax burden, if there is one, because they benefited from claiming the credit. Only good way is if the daughter does not have any taxable income as it has been said, the standard deduction very well may wipe out any tax due. Agree, no election but as with all of these credits, document and be sure to do your due diligence. Again, CYA!!!

Also for the AOC, pay attention to the parents AGI to be sure they still qualify. In my opinion the $400.00 per month paid for room and board is just plain gone. One way for parents to lessen the pain a bit is to make deposits into a 529 plan where the interest is tax free as along as the funds are used for educational purposes. 

[Terry D EA]

Let me chime in here again. I know some of us don't like clicking on links. But the link I have posted shows the tuition and fees had expired and has not been extended. It was not part of the extender credits extended on Dec. 20. Please correct me if I'm missed something here but I don't want to see a bunch of folks get burned on this when talking with clients. If the tuition and fees deduction has been extended, please give me a resource.

https://www.efile.com/new-tax-breaks-cuts-changing-extended-expired-laws/

[Terry D EA]

Well, I stand corrected. Form 8917 is available on the IRS site for 2019 and shows a revision date of January 2020. Accept my apologies.

Form 8917 (Rev. 1-2020) Page 2 General Instructions Section references are to the Internal Revenue Code unless otherwise noted. What’s New Deduction extended. The tuition and fees deduction is extended for qualified tuition and fees paid in calendar years 2018, 2019, and 2020. Don’t claim the deduction for expenses paid after 2020 unless the credit is extended again. Use Form 8917 (Rev. January 2020) and these instructions for years after 2017, unless a newer revision is issued indicating it is succeeding this revision.

Apparently the author of the site I posted is not up to date. The article is dated Jan 23, 2020 so don't pay any attention to that. 

[Christian]

First, I would like to thank all of you responding. The parent does not qualify for any credit or tuition and fees deduction by my lights since his tuition was fully covered by the scholarship. The remaining scholarship amount in excess of the tuition was used to buy books, fees, etc. This exhausts the entire amount. I plan to file dad's return and simply not claim the credit as his expenses at the college amounts to what he is paying for room and board. I regard him as a lucky dad having much of this huge expense covered by scholarship funds. I do not see a large number of returns using these education credits so this forum  is a godsend for an aging coger.   

[Lion EA]

If the dad qualifies, and if moving $4,000 or whatever is needed for dad's benefits to taxable scholarship for daughter's return, and if her standard deduction will wipe out any taxes on her return or at least keep her in a lower tax bracket than dad, then you may have a better result for the family as a whole. Please run the returns with dad taking AOC or T&F or LLC and daughter having more taxable scholarship to see what gives the whole family the best outcome. Compare that set of returns with the ones you mention above. If you can lower the family's tax liability, the dad will think you are a hero, and you will have their whole family as tax clients forever.

[Christian]

Once more into the breach dear friends. Lion I gather from your post I can add the ENTIRE scholarship to the daughter's return as income reported by her even though she did not work. In doing so she would incur a tiny tax liability. Her father then can claim the AOC even though his child's entire college expense except room and board is covered by her scholarship? Good grief am I dreaming? And just so you will know I am already their hero.  Where in the instructions is this written?

 

[Catherine]

I don't know where it's written (as I looked it up years ago) but this is indeed something I look at with every scholarship and even with 529 distributions.  Instead of taking the 529 tax-free you can choose to claim the *gain* as income (no penalty, if still used for college expenses).  The basis certainly isn't income; there was no tax benefit when putting it in to a plan.  Then those college expenses become eligible for credits and deductions (AOC, LLC, T&F) as appropriate.  I run them all three ways; every now and then I get a surprise and one scenario that I didn't think would work out actually works better, for whatever reason.  

The tax code has some intricate and surprising interactions, once the entire family picture is put together.

[Possi]

Just one more thing... if the scholarship is GI Bill money, the excess is not taxable. I'm in a high-military location, so I always ask. 

https://www.irs.gov/individuals/tax-exclusion-for-veterans-education-benefits

[Catherine]

2 minutes ago, Possi said:

if the scholarship is GI Bill money, the excess is not taxable

Good point!

[EricF]

Please see the discussion on pages 4 and 5 of the Form 8863 instructions, with fuller discussion on page 16 of Publication 970, for IRS approval of this strategy.

[Lion EA]

You may not need to add the full scholarship to the daughter's income. Run the numbers to see how much you need to give dad the highest benefit in combo with daughter. I don't have one in my office right now to look at. But, I prepare parents and college kids at the same time, all the possible ways, and have some good federal comparisons generated by my software as soon as I do data entry. If states begin with federal AGI, then I look at the states, too, with and without T&F deduction.

IRS Pub. 970 -- especially chapters 7 & 8 explaining the coordination of benefits to get the best result for your family's situation, including examples and worksheets -- covers educational benefits in some depth and refers you to other publications, such as Form 8863 instructions, and other ways to get help.

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

Depending on your software, the Help key may bring up detailed explanations or publications.

Don't forget to show dad how much you saved the family by going the extra mile for him!

[EricF]

Yes, only make enough scholarship taxable to give dad $4,000 of college costs he can claim the $2,500 maximum AOTC.  But with a standard deduction up to $12,200 for the daughter, it really doesn't matter how much she gets in most cases, unless the state doesn't have as generous a standard deduction, or none at all.

[Jim Oh Bkkr]

Whether good advice or not, I always stress that the client look at the terms of the scholarship to make certain that it is NOT specifically earmarked for anything, ie. tuition only.

I don't know the first thing about scholarships and have never read one.  But I would hate to show a paper trail of a (tuition only??) scholarship being used for room and board to save the taxpayer 2500 in taxes only to have them lose a 4000 scholarship.

 

 

[Lion EA]

Jim Oh Bkkr makes an outstanding point. I always look at that. Because the OP scholarship was more than tuition, it already is being used for more than just tuition, so I didn't bring it up. But, it is still possible that it must cover all tuition before the excess is allowed to be used for non-tuition. That would still leave $2,200 taxable to the daughter and give dad that same amount toward AOC, T&F, or LLC. When all else fails, read the instructions -- in this case, the terms of the scholarship.

[Christian]

I have asked him to bring me a copy of the scholarship to determine it's full requirements. A guess is it will require coverage of tuition leaving about $2000 for other use. I am making the assumption (not a great idea in this line of work) that if he used this part for books , fees, etc that part can be used for the AOC with any residual reported under the daughter's return if filed. I am also assuming I would need a billing statement from the burser's office to prove this just in case? Of course, a call to the practitioner hotline yielded the advice that the entire scholarship is tax free and this will need to weigh on my final determination as I don't want any possibility of an IRS problem. On that basis he gets no credit and there is no need to even report info from the 1098-T.

[Terry D EA]

I agree with your position. Yes, get a statement from the bursar's office. Yes, review the scholarship terms and then you will make a decision that you will finally be comfortable with. You have been given very good advice here that is thorough.