Costly tax mistake re scholarships?

Paying for College
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<p>I may have made a costly mistake on our taxes last year and could use some help before amending them, and maybe this will help others too.</p>

<p>Child received scholarship for tuition, housing, technology, and cash for National Merit (say $9,000 for her first semester). Last year, I accidentally included it all in the tax free side, when apparently only the tuition (say $4,000) should have been tax free. As a result, we got zero for any credit like American Opportunity.</p>

<p>If I amend the return and only put the tuition ($4,000) in the tax free side, and all of the rest ($5,000) on the taxable side, we get an education credit of more than $1000 and more than $800 Amer Opp credit. This does raise the tax amount owed by the child for the taxable portion, but the taxes owed are not much.</p>

<p>So, it looks like I was made about a $2,000 over payment last year, and I just wanted to hear from someone about whether I have it right this time. Thanks a lot for any help.</p>

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<p>No, you don’t - be very careful!</p>

<p>The taxable portion of the scholarship is the portion used to pay for non-qualified expenses. Qualified expenses include tuition, fees and books. </p>

<p>Qualified expenses are also what are used for the American Opportunity Credit. You only qualify if you (or the student) paid those expenses. Since they were paid for with scholarship money, you wouldn’t qualify.</p>

<p>If you’re saying you would use the scholarships for all but $4000 of tuition expenses, and the scholarships were allowed to be used for other expenses, then yes you could qualify.</p>

<p>Also, what do you mean "an education credit of more than $1000 [bold]AND[/bold] more than $800 American Opportunity Credit? You can only claim one education credit per student - either the AOC or Lifetime Learning Credit, not both. You also cannot claim both a credit and the Tuition and Fees deduction.</p>

<p>Students who get full tuition scholarships that are required to be used toward tuition can only claim other expenses (books, for instance) toward the AOC.</p>

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<p>Are you including the scholarships on your tax returns or the child’s tax returns?</p>

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<p>CTScoutmom,</p>

<p>Thank you for the help. I just want to get this right. I am using TurboxTax, and it know how much we had in scholarships and what our expenses were. Form 8863 shows about $1200 in AOC and about $800 in Education Credit, and it put both amounts on the 1040. So, am I supposed to delete one of those (the smaller one)? It seems like Ttax would throw up a red flag and tell me to make a choice. But, whatever.</p>

<p>And to be more clear about the situation, we had about $3,000 more in expenses than were covered by scholarship. To further complicate it, we had QTP money come in, so I am hoping we can apply that to the $3,000 above the scholarships.</p>

<p>mom2collegekids,
Our child is a dependent, so we are doing all of this on our return, then Ttax tells me to put the taxable amount on our child’s return (she was employed and filed a return). So the taxable portion goes to her.</p>

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<p>On the Student Info Worksheet, it totaled Qualifying Expenses at abt $7,000, deducted abt $4,500 in tax free assistance, and showed a balance of $2,500 that is our Adjusted Qualified expenses for AOC purposes. </p>

<p>Ttax put that amt on the 8863, did a calculation, and came up with say $2099 as our tentative AOC. Later in the form, it separated the $2099 and showed $840 as the Refundable AOC and $1259 as the Nonrefundable Education Credit. Thoses are the numbers it put on separate lines on the 1040, as though we get both.</p>

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<p>Most of our college kids are dependents, that doesn’t mean that we have to put any of it on our returns.</p>

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<p>What Turbotax appears to be saying is that the $1259 credit reduced your tax liability to 0 and so you get the $840 back as a refundable credit. Both are from the AOC. You do get both parts of the AOC if you are doing things right.</p>

<p>However, the 529 distributions can’t be used for the AOC unless someone declares the earnings portion of the distribution as taxable. Did you get a 1099Q? Who’s SSN is on it? If your child’s, then they could report the earnings as taxable along with the scholarships/grants. And Turbotax should have questions on your return asking how much the child declared as income.</p>

<p>Even if your child has to pay some tax, as a family you will probably be better off doing that and getting the AOC. A credit is dollar for dollar.</p>

<p>But if you do this, you do have to understand it and do it right.</p>

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<p>I think Annoyingdad is right, in terms of how Turbotax calculated your credit. It doesn’t look like the 529 distribution was taken into consideration, so yes the earnings portion should be taxable.</p>

<p>It looks like it’s divided out like this:</p>

<p>Total Expenses: $12,000
Qualified Expenses: $7000
non-qualified expenses: $5,000
Scholarships: $9000 ($4600 tax free, $4400 taxable)
QTP: $3000 ($2400 potentially taxable - because you want to use that toward AOC, the other $600 is not potentially taxable because it was used for expenses qualified for QTP, but not for AOC).</p>

<p>Net result: total AOC credit of $2100
$840 (40%) refundable portion
$1260 (60%) used to reduce tax liability.</p>

<p>More could have been claimed to get the full $1000 refundable portion, but does not make sense to do so:</p>

<p>If you had used $4000 toward AOC, you would have $1600 more taxable scholarship, for only $160 benefit - a wash if the student’s tax bracket is 10%, worse if the student earned enough to be in a higher bracket.</p>

<p>Your next step is to take the QTP distribution, and determine what portion is actually taxable. To do this, you will need the 1099Q which will show how much was earned vs. original contributions. Refer to Publication 970 to see how to calculate the taxable portion - incidentally, it’s OK if you had more than $3000 distributed, due to the scholarships. That is also explained in Pub 970.</p>

<p>If the distribution was in your SSN, you may need to amend your return, if sent directly to the school, it may be reported under the student’s SSN, and would be reported there, not requiring you to amend your own return.</p>

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<p>annoyingdad, Thanks for your help. So are you thinking we get to use the AOC even if the school paid the tuition with a scholarship? Also, you aren’t suggesting that we can move the 529 earnings to the child without moving everything over to the child, are you? The Student Info Worksheet is a part of our return, but it has child’s name and SSN on it, and it includes everything about the college assistance and expenses. Thanks again.</p>

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<p>If the scholarship must be used to tuition, and covers all qualified expenses (that would include required fees and books too), then you cannot claim the AOC. However, it looks like TurboTax is treating the scholarship as available to use for ANY college expenses. I don’t know how TT handles that question, but I know the software we use in our office asks how much of the scholarships are required to be used toward tuition/fees/books. That prevents the program from shifting them over to the “taxable scholarship” side of the equation.</p>

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<p>No, I’m not saying that at all. Qualified education expenses(QEE) for the AOC have to be reduced by the amount of scholarships/grants. And 529 funds used to pay QEE can’t be used tax free for the AOC. However, if the terms of the scholarships/grants allow, you can allocate them to non-QEE(such as room and board) and have the student report them as income. Also, if the student reports the earnings portion of the 529 distribution as income(assuming their SSN is on the 1099Q), then the 529 funds can be used for QEE for the AOC. Each of these actions may allow you to claim some of the AOC.</p>

<p>As I said, it is complicated and when using Turbotax or any software for that matter, you need to carefully read and understand each question it is asking and put in the right numbers or it will give incorrect results. </p>

<p>You didn’t answer as to whether you received a 1099Q and whose SSN is on it. </p>

<p>I don’t know what you mean by ‘moving everything over to the child’.</p>

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<p>I appreciate everyone’s patience and help. The 1099Q is in child’s name with her SSN, and at the end of calculations, Ttax tells us to put an amount on her return as income. That amount appears to be the taxable portion of scholarships on the Student Info Worksheet. </p>

<p>As for the scholarships, child received from the university (National Merit),</p>

<p>Tuition for four years
On campus housing
Technology allowance of $1,500, (and more in coming years but not yet taxable).</p>

<p>We see that our child’s account is billed for the tuition and housing each semester, but then the college credits those amounts. </p>

<p>I really appreciate the help. I’d like to think I can count on Ttax, but maybe not.</p>

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<p>I don’t use Turbotax, I use Taxact and it walks you through the education expense things very nicely. There was a thread 3 weeks or so back when someone who used Turbotax was telling me TT asks the same questions.</p>

<p>It sounds like the Student Info Worksheet is a result of these questions. TT needs to know what is being reported on the student’s return to be able to coordinate the student reporting taxable scholarships and/or taxable 529 earnings distributions with what expenses are available to you for the AOC. On the student’s return TT needs to know what expenses you are using for the AOC so it knows what part of the scholarships/grants and/or 529 earnings distribution are taxable to the student.</p>

<p>So on both returns TT will ask for scholarship/grant info, expense info, 529 distribution info, non-QEE expense info(such as room and board) so it can coordinate the two returns.</p>

<p>Perhaps if you give us all the numbers, both QEE and non-QEE expenses, the amount of scholarships/grants and the amount of 529 distributions we can help more specifically.</p>

<p>Edit: From your last post it sounds like all expenses were paid and you may not have non-QEE expenses to shift anything to. What expenses were paid with the 529 distribution?</p>

<p>You can count on Turbotax to do the right thing as long as the correct amounts are entered for the right questions and all the relevant questions are answered correctly. That’s the hard part with any software.</p>

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<p>I concur, the only remaining QEE would be books. What questions did TT ask about the scholarships? Because it looks like TT is assuming that the scholarships could be used for something other than QEE, but from your last post it looks like they are restricted (and there really isn’t much else to use them for anyway). </p>

<p>The portion of the scholarship used for room & board is taxable, as is the technology allowance.</p>

<p>The earnings on the QTP (box 2 of the 1099Q) should be treated as fully taxable, and reported on her return. Some of it could be non-taxable to the extent she paid for books (and any other fees, if not covered by the scholarships), but those expenses should instead be used to qualify for some portion of the AOC. </p>

<p>I know books are expensive, but the $2400 TT comes up with (to get $2100 AOC) is suspect. As Annoyingdad has said, the quality of the answer you get from software is going to be based on the quality of the responses to the questions (and the quality of the questions themselves). There is confusion even among paid preparers in how the various educational tax breaks work - which is one reason it costs so much to have one of us prepare your return. If we handle these returns on a regular basis, and are confused, I can only imagine how confusing it is to the lay person. Incidentally, I feel the same way about the CSS profile, after trying to talk several clients through the process (after completing our own, of course - nothing like understanding better once it applies to you personally).</p>

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<p>I am pretty much ready to give up. Upon further reading, maybe Ttax had it right before. But, here are some numbers for that semester:</p>

<p>Total Qualified Expenses $11,070
Total Scholarship $8,414</p>

<p>Expenses over Scholarship: $2,556</p>

<p>QTP incoming $3,950 (earnings part was $2,725)</p>

<p>So incoming exceeded expenses: $1,394, taxable to child.</p>

<p>Am I correct (am I may have been told this already) that if the school, not us, paid the tuition, there is no way in the world that we can get any of the AOC and I need to move on?</p>