On Turbotax when I did my D’s taxes, it just asked how much of scholarship paid for non qualified expenses, and it put that amount right on the rax return as taxable.
If he had $9,000 taxable scholarship, he needs to report that.
If he had $8,500 in taxable scholarships ($9,000-$500 books), then he reports that.
https://www.irs.gov/publications/p970#en_US_2016_publink1000300227
^This is from the rules concerning coordination with Pell grants and other scholarships in order to claim AOTC.
I think the rule you mentioned from page 15 Pub 970 only applies to declaring otherwise tax-free educational assistance taxable for the purpose of claiming AOTC.
But most of his scholarship is already taxable because his qualified education expenses like tuition was covered by FL prepaid.
The only other QEE is books.
Right, that is why I am wondering if I can actually use the tuition cost paid for by FL Prepaid for the AOTC credit since he already has to claim the $9k in scholarships as taxable, and he would just pay tax on the earnings from the prepaid. He isn’t converting scholarship to income for the benefit of taking the AOTC, so he doesn’t have to worry about the rule you posted above. Would you agree?
Florida prepaid dollars are already tax benefited, so I don’t believe they can be used for AOTC even if you declare them taxable. If you had used BF to pay the tuition, I think you can declare it taxable, but you cannot use 529 money to pay any expenses and then declare those taxable to take the AOTC, so I don’t see how you could do the same with FPP money.
I think I would just declare $9,000 scholarship taxable on his return, and claim $500 AOTC for books.
What is the parental tax rate going to be?
Do you qualify for AOTC income wise?
You can try and play with the numbers in tax software and see what the difference would be with either scenario ($9,000 taxable scholarship/$500 AOTC, $8,500 taxable scholarship/$0 AOTC), provided you would qualify for AOTC in the first place.
Let me try and challenge that and see what you think. Florida prepaid is basically a QTP. Pub 970, pasted below, states you can combine the qtp with the aotc, as long as you don’t use the same expenses. In the example below, the parents are claiming the aotc using the distribution from the 529 plan so the child can’t use those same expenses to determine her tax on the 529 earning. When I read this it seems similar to my situation. Thoughts?
Coordination With American Opportunity and Lifetime Learning Credits
An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren’t used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.
In 2009, Sara Clarke’s parents opened a savings account for her with a QTP maintained by their state government. Over the years they contributed $18,000 to the account. The total balance in the account was $27,000 on the date the distribution was made. In the summer of 2016, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. She paid her college expenses from the following sources.
Assume the same facts as in Example 1 , except that Sara’s parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses).
Total qualified education expenses $8,300
Minus: Tax-free educational assistance − 3,100
Minus: Expenses taken into account
in figuring American opportunity credit − 4,000
Equals: Adjusted qualified
education expenses (AQEE) $1,200
You know, you get to the point where you do what you can and hope you picked the right answer. Last year, I presented my CPA with some scenarios. He very honestly told me the cost of his time to run them all could very well negate any savings, so I have to pick on and go with it. Did was I thought was correct. All I can say is do what’s maybe easiest/most obvious (something you can clearly and concisely explain in a shot letter to the IRS if need be).
I totally agree, I am not trying to do anything that isn’t allowed but want to do what is allowed to reduce the tax liability. I know my son will need to report the scholarship as income, that is find and I fully agree. But in that last post where I noted the IRS example it seems reasonable that I can follow the same example. Report the QTP payout of tuition as a credit for the AOTC and claim the earnings as taxes. That seems to be exactly what the IRS is doing in their example. I think his scholarship income is totally separate because he has to report it as income so he isn’t converting it to income from tax free. If anyone sees it differently please let me know.
Ugh, it’s so complicated isn’t it when scholarships are involved. I spent all afternoon doing my taxes and my daughters. Luckily she only owed $4 and I did get to claim the AOTC, but it took me a lot of thinking to get there. I fully agree with ordinarylives, do your best and have an explanation ready should you need it. Good Luck!!