Scholarship Question ( again )

[Dave T]

I will obviously need to get clarification from my client but wanted to run something by the board as I have great respect for the knowledge as well as the willingness to help.

A couple weeks ago I posted about my client that had a 1098T with 26K in tuition and 34K in scholarships. I asked about this and she  said it was for off campus housing and food.  Check box as at least half time student and  so it seems 8K of income. 

I did specifically ask her about her studies and she said it was toward a degree.

Well her parents are also clients and when they were over the other day we got talking about the daughter and how well she is doing etc. and the Dad says she is there earning a certificate as she has already earned her undergraduate as well as graduate degrees and she is there because this is an athletic scholarship and still had a year of eligibility left. 

So I go into ATX and uncheck 'Candidate for a Degree' and now the whole 34k shows as taxable ( and of course big tax liability ) but for whatever reason it won't let me at least calculate the Lifetime Learning Credit.

Any advice would be appreciated.

Thank you

[Dave T]

Quick update. The Lifetime Credit did calculate correctly. Had just forgotten to check one box.

Bigger issue still remains is degree or no degree?  

[BrewOne]

I'd really try to find out if there are any rulings on whether a certificate counts.  Or if it is valid to say she is working towards another Bachelor's or Master's

[Lee B]

"Who is an eligible student for AOTC?

To be eligible for AOTC, the student must:

Be pursuing a degree or other recognized education credential

Be enrolled at least half time for at least one academic period* beginning in the tax year

Not have finished the first four years of higher education at the beginning of the tax year

Not have claimed the AOTC or the former Hope credit for more than four tax years

Not have a felony drug conviction at the end of the tax year."

According to the OP she has already finished her undergraduate and graduate degrees.

Once you have finished the first 4 years you are no longer eligible for the AOTC.

[BrewOne]

I was looking at the taxability of the income, not the credits.  How many students actually get their degree?  I don't see how a full-time student couldn't claim they were seeking a degree if they're at an eligible institution taking regular courses.

And if there is income over the standard deduction...for the lifetime learning credit, I don't see anything about degree-seeking.

[TexTaxToo]

They are not eligible for AOTC if they already had their first 4-year degree at the beginning of the tax year (the number of years they actually took to obtain it doesn't matter).

There would only be 8K of income if they do not claim a credit and the scholarships could be used to pay tuition and other qualified expenses. You subtract all qualified expenses from the scholarship to get the taxable amount. There would only be 34K of income if the scholarship may ONLY be used for living expenses and CANNOT be used to pay tuition, etc., which is rare.

If they claim LLC, they would have to allocate more of the scholarship to living expenses, increasing the amount of income, to get the credit.  But there would be no reason to allocate more than another 10K or 18K total , so 18K would be the maximum taxable (again assuming the scholarship allows either - and you have to make sure they actually had that amount of living expenses before allocating it thus).

Claiming the LLC may or may not be beneficial, depending on income.  Since LLC is not refundable, they would have to have enough other income to take full advantage of the credit, but the marginal rate would have to be less than 20% (since the LLC is a 20% credit).

One does not have to be in a degree program to claim the LLC, but if not, the courses must be taken "to acquire or improve job skills".

[GLJEANNE]

It's always one little checkbox, isn't it??  Those things feel like the bane of my existence some days!