1098-T / AOC Tax Credit Questions

Paying for College
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<p>Ahh, here it is from Publication 970:</p>

<p>"Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student’s tax return in the following situations.</p>

<p>1) The use of the money is restricted to costs of attendance (such as room and board) other than qualified education expenses.</p>

<p>2) The use of the money is not restricted and is used to pay education expenses that are not qualified (such as room and board)."</p>

<p>I read that as:</p>

<p>1) You can allocate scholarship funds to non-qualified expenses (anything included in COA), if the scholarship requires that. For example, if you have a scholarship that’s specifically for room and board, you would allocate it to that, but it would be taxable.</p>

<p>2) If the scholarship doesn’t state specifically where it should be spent, you can allocate it towards non-qualified expenses (I’m assuming to anything within the COA). For example, if you get a scholarship that just says “educational expenses”, you could allocate it towards anything in the COA. If you choose to allocate it towards qualified expenses (tuition), it would be tax free, but you can’t use those allocated dollars towards the AOC. If you allocate it to non-qualified educational expenses, you can use it for the AOC, but it’s taxable.</p>

<p>I wonder what happens if the scholarship is restricted, but can be used for qualified OR non-qualified expenses? If a scholarship says “can be used for tuition, fees, books, transportation costs, or child care” could you technically allocate it to transportation costs, call it taxable income, and leave your tuition unallocated in order to take the AOC?</p>

<p>I guess anyone trying to figure this out should start a spreadsheet…</p>

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<p>Interestingly enough, I’m volunteering for VITA (Volunteer Income Tax Assistance for the elderly and low-income) through my accounting honorary society.</p>

<p>Our materials, which are provided directly from the IRS, specifically say to reduce the qualified education expenses by scholarships/grants. Nary a word about this.</p>

<p>It’s very sad to me that governmental agencies automatically assume that most folks are too dense to understand the intricacies. I’ll probably be preparing taxes for low-income students and parents, and I bet you dollars to donuts that the IRS provided software won’t even let us do anything except qualified tuition minus scholarships. Yet obviously, there are other considerations to take into account. How many other things are there like this? And how helpful is it to accounting students and low-income people to not even let us learn about things like this?</p>

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<p>Thank you to everyone responding to my questions. You have been a great help!</p>

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<p>This thread has both clarified and confused things for me, lol! I now have 2 students in college and all of this ambiguity with taxes is driving me crazy. WHY does it have to be so complicated???</p>

<p>With my older student, I have basically just plugged in the info from the 1098-T into the online tax software and it’s been fine. The AOC didn’t come onto play when he first started school so we weren’t dealing with it.</p>

<p>However, my younger graduated spring 2011 and goes to college now (on quarters). He received a couple of small scholarships awarded by high-school related parent, sports groups, etc… When I plug that amount into the online tax program where it asks for “scholarships not reported on the 1098” (using several different programs to be sure I get same end result), it reduces the AOC/refund amount.</p>

<p>The scholarships were just directed toward any expenses (used up already for tuition) and were paid directly to my son in check form. The school would have no information on these for the 1098.</p>

<p>I assume it is correct in putting them on the taxes as such and would reduce the AOC?</p>

<p>After reading this and trying to finish the taxes to do the FAFSA next, I want to be sure I’m doing this right. I am not a numbers person, but usually our taxes are pretty basic and I manage them fine on my own. But all of the IRS rules and school…yuck!!!</p>

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<p>I think that the alternative to having them reduce your AOC is to have your son report them on his taxes as taxable scholarship income. This is only an option if your S had the option of using the scholarships to pay for non-qualified expenses, such as room and board, travel, etc. </p>

<p>If you can put in some rough numbers (how much qualified and non-qualified expenses he had, and approximately where all the money came from) that would help us figure out what your options are. Being able to take the full AOC requires that you paid at least $4K out of pocket, and are able to arrange whatever other funds your son had for school so that that 4K out of pocket gets allocated to qualified expenses.</p>

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<p>mathmom, total tuition billed before the end of the year including for winter quarter (due in December) as reported on 1098 - around $4250 </p>

<p>College-awarded scholarship reported on the 1098 (2 quarters, applied in December, tuition only) - $600</p>

<p>The balance of tuition paid by him/us -</p>

<ul>
<li>$750 in cash from high school class scholarships (could be used for any expenses, was paid directly to son in check form)</li>
<li>$800 (for 2 quarters) of a small federal student loan</li>
<li>cash </li>
</ul>

<p>Only other qualified expenses for books, around $200. He lives off campus. </p>

<p>I know this is small potatoes compared to most of you, and putting in that $750 on our return in the “other scholarships” part reduces the refund by only about $200, but I do want to make sure that I’m inputting this correctly so it doesn’t come back to haunt us. :wink: The refund seems to be extra large this year and I am paranoid that I missed something…</p>

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<p>Is he living at home or in an apartment off campus? </p>

<p>Does he reasonably have $750 in college-related expenses other than tuition/books that he could have spent that $750 on?</p>

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<p>He lives in an apartment away from campus, attends a regional but lives off main campus of the large university (about 30 miles away). There is little housing near the regional so students find places further away.</p>

<p>I guess it depends on the definition of “college-related expenses”. I don’t see how it would be possible, the expenses at a regional are mainly tuition and books. That particular $750 might have been used to pay rent, gas, laptop, etc. He also worked over the summer, making about $7500. It’s not like he/we specifically broke it down into scholarship vs wages - it was just all in his bank account and used as needed. Maybe he should have been more particular about it?</p>

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<p>If the scholarships don’t have any restrictions on them, I think he could quite reasonably use them for rent. And if he does that, he reports it as taxable income, and you don’t report it as scholarship income on your taxes. It won’t reduce your AOC in that case but he may then owe taxes on it since he had $7500 in additional income. You’d want to try his taxes both ways and see which way works out the best. I think you’ll still be better taking the credit, as he’ll be taxed at a low rate, but don’t forget to take into account any state taxes that he may end up owing as well.</p>

<p>I’m not a tax expert, though, just going on my reading of pub 970 and other discussions here.</p>

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<p>Thanks, mathmom. I’ll try it. With initial numbers playing, it looks like it works best on ours. I’ll add in the state info and see what we get. Appreciate it!</p>

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<p>Wow! $7500 sounds like a pretty good summer job! </p>

<p>I’ve always done our taxes on paper, then loaded them into TurboTax. Not this year. I just loaded everything straight into TurboTax and as a result, I don’t fully understand what generated some of our numbers. My head is reeling from all the scholarship/qualified expenses/not qualified expenses. </p>

<p>I’m going to have to save this thread & re-read it several times, as we are hopeful that our ds will win a few small scholarships from local civic clubs. Those scholarships will not have any designation for spending - he can use it for clothes if he wants, but he will use it for school-related stuff anyway. He’ll have either transportation costs (we live about an hour away from his first choice) or room&board expenses that would be non-qualified but legitimate education RELATED expenses, if I understand that term correctly.</p>

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<p>collegemom, yes, he was very fortunate to get that summer job! It was not the easiest work, for sure, but it certainly helped and also him feel proud of himself for working a “man’s” job, so to speak, lol!</p>

<p>I have one additional 1098 question - so tired of thinking of all the numbers! (I’m working on the FAFSAs at the same time, ugh!)</p>

<p>Since son has to file a tax return, does that 1098 info get input on BOTH tax returns? The tax programs obviously ask for the info on both as they calculate. I’m a little confused. Do we just not put the info in his taxes at all if we are claiming the AOC? </p>

<p>Maybe I’m just numbered addled by now!!!</p>

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<p>If he is still your dependent - meaning, you still provided more than 1/2 of his support (if he puts $$ in savings, he is not using it for his own support, but I don’t know any more about that topic - if my ds gets scholarships, etc., I’ll have to learn about it next year) then your software should not allow you to input it in his return. It should crunch the numbers for your return & put it where it will give you the biggest tax refund - in our case, that was by using the American Opportunity Credit. You can only use the 1098T information on one return.</p>

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<p>Oops. Actually, I don’t know about the 1098Ts, but I couldn’t edit that post, so I hope anyone who reads it reads this one too.</p>

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<p>Not sure exactly what you’re trying to say here, but that doesn’t sound right to me. Basically, there are two separate tax returns for two separate taxpayers - the parent(s) and the student. The 1098T is issued in the student’s name and SSN and there is no issue as to whether the kid is claimed on parent’s taxes or not and can report excess scholarship income on their own return - the student will not get a personal exemption but can still file and receive the $5800 standard deduction for a single person. The only time the issue of who is claiming the student comes into play is in determining who can actually take the AOC. If the student is claimed by another taxpayer, he cannot claim the AOC (but the taxpayer claiming the exemption for that student can, assuming they have qualified expenses paid).</p>

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<p>sk8rmom - I was indeed thinking just of the AOC. Thanks for clarifying that! I did not have to deal with any excess scholarship money. And I should have re-read the thread before I posted. Thanks again!</p>

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<p>I think the confusion is because the scholarship I was speaking of ($750) was paid directly to my son and is not reported on the 1098, could be used for any expenses, and wouldn’t be in excess of tuition. When doing taxes online, the programs automatically ask about scholarships received that aren’t reported on the 1098. Doesn’t matter if it is the student tax return or the parents. Makes it confusing as to where to claim it or even IF can claim it on the student’s.</p>

<p>The scholarship is not in excess of tuition, but because it was in a bank account with other earned wages, it may or may not have been used as unqualified expenses - my son didn’t break down what he used, he just took money out for bills/expenses like anyone. </p>

<p>So we haven’t been able to figure out if we should use it as qualified expenses on our own return, unqualified expenses on our return, or unqualified on his return (which would increase his AGI). If I plug it into his return as unqualified expense income, it obviously is less than how it would affect an AOC credit on ours.</p>

<p>Maybe someday they will make this simple…</p>

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<p>We decided to count a portion of the scholarship as taxable income on the student’s returns. But I am not sure where exactly on form 1040EZ this income would be reported. Any help?</p>

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<p>Arutha, net scholarship income is reported on the same line as wages, along with a notation to the side indicating the amount and the letters “SCH”.</p>

<p>Friedpasta, it’s almost always better to have the student report the scholarship income and let the parent take the AOC, up to the AOC limit. Most students are in the 10% federal income tax bracket and the AOC is 25%. File whichever way benefits you the most…there’s no need to pay more than the law requires!</p>

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<p>Thanks, sk8rmom! That’s what we figured when we played around with the numbers. </p>

<p>I’m now working on both kids’ FAFSAs and am afraid to see what this son’s, the one with the scholarship question, EFC is going to be. I just submitted my older son’s and his went up almost $1300 from last year, with a summer job (under $2000) and not much change in income on our part. Disappointed because that means he won’t get the same grant he got this year, which was a nice $3000. Oh, well. I’ll finish off the other FAFSA and got to bed - tired of thinking about it!!!</p>

<p>Thanks to all for the info.</p>