Am I understanding correctly about grants, taxes, and AOC?

Paying for College
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<p>I've spent the last hour searching old threads but am still a little confused. I think I understand, but am hoping someone can tell me if I'm right in my analysis of the best way to allocate grant/scholarship monies. This is our first child in college and it's so confusing!</p>

<p>Here's the situation:
D received institutional grant $42,850
one year's tuition and estimated book expense is about $43,000
She will probably have aprox $2100 income from federal work study (I believe not taxable?)
She will also have aprox a few thousand dollars income from summer work (taxable but she takes standard withholding and usually gets a refund)</p>

<p>I understand how the AOC works, I think. The first $2000 in qualified exemptions (tuition/books) is a direct tax credit, right? So $2000 comes off of taxes owed. (Then goes to 25% up to $4000.)</p>

<p>(We are looking at the college financial picture as a family, so in this situation it doesn't matter whether we're talking about student or parent savings... trying to figure out the best plan for the whole family.)</p>

<p>It seems to me there are two scenarios:</p>

<h1>1) Use the grant to pay the tuition/fees and books at college bookstore first. Pay out of pocket for remaining ~$150 of books. Take AOC credit on that amount.</h1>

<p>Net gain: $150 taken off parent taxes owed.</p>

<h1>2) Use the grant to pay for some portion of room/board, let's say $1,800.</h1>

<p>We pay $1,800 tuition plus $300 books out of pocket.
Take AOC credit on $2,000.
Student must claim as income that $1,800 that went towards room/board as not qualified exemptions. She pays income tax (10%??) on that, or $180 federal plus state (not sure what that is but lets say an additional $50 or so.)
Net gain: ~$1,770 taken off parent taxes owed. (I understand that if you don't owe that much, you only get 40% as a refund. We normally do owe that much though so should be OK.)</p>

<p>The second scenario puts more money back in the college kitty. But am I understanding this correctly? Am I missing something?</p>

<p>We use Turbotax, and do not have (and cannot afford) a tax adviser, so trying to figure this out ourselves! Thank you!</p>

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<p>

The school year doesn’t align with the tax year, and you paid the expenses by the school term.</p>

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<p>@4kidsdad‌
Can you elaborate? This is our first child in college so I’m having a hard time keeping up with all the new info.
I believe that the grant is awarded per semester. At least that is how it is laid out in the FA award letter… separate amounts for fall 204 and spring 2015.</p>

<p>I’d assume that for the 2014 taxes, the pertinent info would be
fall 2014 grant
fall 2014 tuition/fees
fall 2014 books
2014 student income from right now, summer
fall 2014 work/study income
2014 parent income</p>

<p>And then for 2015 it would be similar except for two semesters. In my example above, that would be like for 2015: two semesters.</p>

<p>What is it I am missing about this? (I’m sure there’s something!!!)</p>

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<p>Federal work study IS taxable for federal (and probably state if applicable) taxes and must be reported on her tax return if she has enough income to have to file (or files to get a refund). However it does not incur FICA taxes. Also, it is not held against her in FAFSA when calculating the EFC.</p>

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<p>@swimcatsmom Thanks for clarifying that! But for the sake of this comparison, it does not affect the bottom line, I think. Right?</p>

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<p>Your child will file taxes and pay taxes on her earnings, including any room and board you decide is paid from scholarship money. She will also get a $6100 (2013 amount, may go up a little) standard deduction on her taxes.</p>

<p>So say she earns $2000 in the summer and $2000 from WS, and you decide she needs to declare $2000 from the scholarship as income so you can claim $2000 AOC. All is fine and she’ll owe no federal tax as all covered by standard deduction. If you want her to claim $4000 so you can claim the full $2500 AOC, she’ll pay taxes on $1900 of that, which is still probably cheaper than your paying them, but still should be considered in the ‘is it worth it to save a few bucks’ category.</p>

<p>You can only claim the AOC for 4 tax years, so you have to decide if it is best for fall of freshman year or spring of senior - if you have at least $2000 oop for freshman year, I’d do it then because you never know what will happen in 4 years.</p>

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<p>Ah- good point!! I hadn’t considered the 4-year thing. I did read that the AOC is in place until 2017 and then may go away. Spring of senior year will be 2018, so maybe it is best to take it this fall.</p>

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<p>Spring of senior year is iffier as the student may not be a dependent for that calendar year, if they get a job straight out of college. And I don’t think you can claim the credit in a year that the student is not a dependent (though maybe she can claim it for herself). So I’d also lean toward 2014 being the first of the 4 years, if you can.</p>

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<p>Thanks folks! So— I am right, yes, in my interpretation of how to allocate the grant money for the most benefit? We should pay some of the room/board with it and take the larger AOC deduction?</p>

<p>(That is, assuming the college lets us allocate the grant money as we wish. I don’t know if that’s true or not…)</p>

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<p>The school will lump all payments together, but you can ‘separate’ them in your tax filings. Just carefully map out what you are doing.</p>

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<p>It’s fine to search CC and get help in this thread but you also should become familiar with IRS Pub 970 if you’re not already:</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf”>http://www.irs.gov/pub/irs-pdf/p970.pdf&lt;/a&gt;&lt;/p&gt;

<p>It has all the details about education topics. If you have any 529 funds that will be paying for any of your out of pocket costs read about coordinating distributions with the AOC.</p>

<p>There’s also a new twist starting with tax year 2013 that scholarships/grants are considered unearned income for the purpose of form 8615, the kiddie tax. So part of tax scholarship/grant amounts may be taxed at the parent’s rate if higher. It can make the student declaring additional amounts taxable less desirable than before. As of 2013, taxable scholarships/grants are still earned income for the purpose of the standard deduction. Your state could treat them differently though, mine does.</p>

<p>See this thread. You can start with the February 1, 2014 posts on page 2.</p>

<p><a href=“Scholarship as Investment Income? - #16 by 2collegekids - Financial Aid and Scholarships - College Confidential Forums”>http://talk.collegeconfidential.com/financial-aid-scholarships/1473041-scholarship-as-investment-income-p2.html&lt;/a&gt;&lt;/p&gt;

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<p>Thanks! @annoyingdad I do have a copy of Pub 970. …and thanks for the link to the thread on form 8615. Looks like the scholarship/grant money over $2000 may be taxed at my rate. But since we are talking about $1800 or so, it shouldn’t make much difference. It’s so complicated, argh! I’ll certainly be revisiting all this next winter. but I should at least figure out the basics of how to allocate the grant before the bill comes this summer, right?</p>

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<p>You don’t really need to figure it out before you pay the bill, unless there is a question of paying some of it from a 529 account. There’s nothing you’ll do differently when paying your portion. You just allocate it as the situation warrants when filing your taxes next year.</p>

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<p>Oh, great! I didn’t realize that. I haven’t actually seen a college bill so I assumed I had to decide when paying it where the grant money went. That makes things much easier (and less stressful.) Thank you!</p>

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<p>I’ve only ever been billed by one college, but they basically added up all the stuff we owed them for, then subtracted our grant aid and loan proceeds, and asked us to pay the rest. They don’t care which dollars are going to which parts. If your kid moves off campus, then you do pay rent and groceries separately, but initially when you’re paying the college for everything, it’s pretty easy.</p>

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<p>Be alert for when the school bills for spring semester. If they bill and you pay your out of pocket in December then that will be for 2014 taxes. Same thing if your D already has a booklist for spring and can buy them in December. You’ll get more out of the 4 years of AOC if that’s the case.</p>

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<p>@annoyingdad Oh, good thinking! So it is when you actually PAY that matters for The AOC, right, not which calendar year you are paying for… So we should be able to pay for both fall 2014 and spring 2015 in the 2014 tax year. And so on…</p>

<p>Thank you all for the advice. I feel so much better about it now. What a helpful community!!</p>

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<p>Yes, but only to a point. For the AOC for tax year 2014, you will be able to use qualified expenses that you paid in 2014 for an academic period beginning in 2014 or beginning in the first three months of 2015. So if the spring semester begins in January, 2015 but you pay the bill in December, 2014, you’re good to go.</p>

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<p>Thank you!</p>

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<p>@staceyneil FWIW, My daughter is at MHC and I can tell you we have been pleasantly surprised by how much less her books have cost than expected. Though I can’t say it’s typical, she has spent a total of less than $300 a semester. The kids do a lot of purchasing or renting used books from Amazon, or buying used from each other. Her majors are in the humanities, and books have tended to be much more expensive in the sciences.</p>