<p>I will be heading to college in the fall and I am looking for advance on how to get the most bang for tax credits, 529 accounts in dealing with scholarships. Situation- I am going to a state school and the total cost of attendance is approximately $19,000 per year, but that includes travel, miscellaneous expenses. The base (room, board, tuition, fees, health insurance which is required) is $15956 per year or $7978 per semester. The tuition/fees part alone is $6803 per semester. So far, I have approximately $7000 per semester in scholarships. Only $1000 of that scholarship amount requires it be spent on tuition/fees. The rest of the scholarship monies doesn't have any rules. I have also been approved for $2750 per semester in unsubsidized Stafford Loans.</p>
<p>I want my parents to be able to claim the federal tax credit each year since I will be taking out some loans. My parents make less than the income cutoff for those so we qualify. I also have about $12,000 in a 529 account. Since that has to be spent on education, I am trying to decide whether to keep it sitting for the expensive graduate school I want to attend or start figuring a way to also take draws from it, but I don't want to jeopardize the tax credit. What is my most lucrative way to take advantage of all options? Suggestions?</p>
<p>Just some quick points until you have more specific questions.</p>
<p>Qualified expenses for the AOC are tuition, required fees and required books and supplies. The health insurance won’t count as QEE, nor will R&B for the AOC. You have to reduce these expenses by the amount of tax-free scholarships and grants. Scholarships are tax-free if used for QEE. $4000 of QEE is required to get the maximum AOC of $2500. QEE paid for with loans can be used to claim the AOC.</p>
<p>It sounds like your QEE is pretty much covered by scholarships. You can make scholarships taxable(i.e. not tax-free) by choosing to apply them to non-QEE items like R&B if the scholarship terms allow. It sounds like you could do that for all but $1000 of the scholarships. You would then have to include that amount of the scholarships in your income(you the student). Depending on your other income you may then have to file a tax return including the scholarship amount you chose to put toward non-QEE. This would be your tax return, your parents can’t include it on their return. If all your taxable income is above the standard deduction you would have to file a return and pay some tax.</p>
<p>You have to coordinate expenses used for the AOC with expenses used for tax-free 529 distributions. The same expenses can’t be used for more than one tax benefit. R&B is QEE for 529 distributions. 529 distributions must be taken in the same tax year as the expenses are incurred so be careful with that. If you mistakenly wind up with an excess distribution in a tax year it will have to be reported to the IRS. If there is not an excess distribution there is no reporting requirement.</p>
<p>Since fall will be your first semester, you may only have the one semester of expenses and scholarships for tax year 2014. If you are billed and pay expenses in December 2014 for the spring 2015 semester then they will count for tax year 2014. If you are billed and pay in January 2015, then those amounts will be included for 2015 taxes. What is important is when the expenses are paid.</p>
<p>It doesn’t sound like you are going to have $4000 in payments per year. Your scholarship is about $7000/sem and your cost about $8000, so you only have $1000 to claim as taxable. Are you sure your numbers are right? Only $1200 for room and board and health insurance per semester? ($7978-$6803 in tuition/fees)</p>
<p>I think I read somewhere recently that the medical insurance costs, while required, are not QEE (but may be deductible as an insurance premium? I have no idea how that works now with Obamacare credits).</p>
<p>You can save the 529 for grad school, but you need to be sure that that is a better deal than using it for undergrad and not taking out loans. With the AOC it may be better to take the loans, but if you can’t take the AOC, it is unlikely you’d be better off paying the interest on the loans while earning 2% on the 529.</p>
<p>@twoinanddone- you were right. My typo. My post should have said the tuition/fees part alone is $6803 per year. Room and Board is $7753 per year.</p>
<p>I am trying to find a way to “have my cake and eat it, too.” I want to be able to use the tax credit and have all of my scholarships with minimal tax liability. I am not as worried about taking loans/not taking loans because my chosen career field offers loan forgiveness.</p>