<p>My son had qualifying tuition and book expenses of $28,045 and a scholarship of $27,433. I paid $8332 for the 2013 year for room and board. Can someone tell me how much of the scholarship he should transfer to his taxable income for me to get the maximum AOC credit? I have no federal tax liability, so I understand the max credit won't be more than $1000.</p>
<p>The tax-free scholarships need to $28,045 - $4,000 = $24,045. The taxable scholarships would be $27,433 - $24,045 = $3,388</p>
<p>You already have some credit. $28045 QE - $27433 = $612. Since you have no tax liability you can only get the refundable portion of the credit which requires $4000 in qualified expenses. so $4000-$612 = $3388. So put $3388 on the students taxes and count $4000 as QE (qualified expenses) on your return</p>
<p>It is not that simple.</p>
<p>The AOC gives a tax credit of 100% of the first 2000 of QE and 25% of the next 2000 for a total of 2500. If you have zero tax liability the you get a max of 40% of that ($2000X100%X40% +$2000x25%X40%) which is $1000.</p>
<p>BUT you need to calculate the tax liability for your son for both Federal and State taxes. What you will find is that at some point his additional taxes will be greater than the additional tax credit you receive.</p>
<p>It depends on your son’s income and state tax rate. I can almost guarantee you that you do not want to claim $4000! Out of all likelihood you will want to have 2000-3000 in QE assuming your son’s income is zero.</p>
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If OP’s son only report the taxable scholarship incomes of $4,000, he would not pay any federal income tax; and I don’t think any state income tax would exceed the $1,000 benefit from AOTC ,</p>
<p>The first 2000 of QE is a no brainer but once you hit 2000 in QE, I believe that it pays to look at the tax impact on the dependent’s return of declaring scholarships taxable to claim the AOC. In my daughter case, any income over 3320 (based on TurboTax) was taxable at a rate of 10%.The state rate was 6% of anything over 3000. Once she hit that point, each additional $1 of taxable scholarship (over the 2000 QE level) saved me 10 cents but cost her 16 cents in taxes.</p>
<p>The above usually only applies if the parent has zero tax liability.</p>
<p>I am not a tax expert. This is just how it played out for me. Every tax situation is unique.</p>
<p>It does depend on how much other income your son had in 2013 and if/how your state and the state he attends college, if different, treat the scholarship income.</p>
<p>If you are saying that 1040a line 28 or 1040 line 44 are zero, then $2000($1388 taxable to your son) of QEE would give you an $800 refundable AOC credit. You have to determine how much that extra $200 would be worth to you vs. what impact the extra $2000 of taxable income your son would have to declare on fed and state(s) would cost him.</p>