I’ve read tons of posts about this and am still so unsure! My DS received a full scholarship as financial aid for tuition and room/board from his wonderful school where he is a freshman… We paid only for health insurance (over $3K) and less than $650 as the balance owed for the first semester. My tax accountant feels that we can add part of the scholarship ($4000) to his tax return, over and above the taxable portion for R&B, to enable me to take the AOTC? Is that OK to do if we didn’t pay any tuition at all? The only qualified expenses that we paid were $291 in fees and about $300 for books. I just feel uneasy doing that, since we paid nothing toward tuition at all.
I have searched all the old posts, but I’m still unsure and those tax returns are going in the mail to me tomorrow. I’m thinking that perhaps we should just claim the taxable portion of the scholarship, which is less than $6200 and not try to claim that credit. This is making me nervous.
Your accountant is right. If you take a part of the scholarship that is paying for tuition that would otherwise not be taxable and decide to include it on your son’s tax return as taxable, that will give you more QEE to enable you to claim more (or all) of the AOTC.
Looking at the numbers you provided, you would need to shift $3,409 of the non-taxable scholarship to taxable in order to claim the full AOTC.
Just claiming the $6,200 taxable portion of the scholarship will do nothing for you for the AOTC, since that money covers non-qualified (for the AOTC) expenses such as room and board.
So even though we didn’t pay that tuition, if we pay taxes on the money that did pay it, we can claim the credit? I am overwhelmed at the generosity of his school, but I just don’t feel justified claiming the credit, when all of his expenses were paid for him.
Yes, that is correct, assuming you meet the other criteria for claiming the AOTC.
Thank you. I appreciate your help MiddKid86. I’m new to all of this.
I’m sorry to disagree, but I don’t think that’s right. If you got a full ride with R & B covered also, then there’s no expenses to swap out for the AOTC. If it was only “full tuition” then you could do it, but total full ride? I don’t think so. You can still claim that amount of fees and books that you did pay toward a smaller AOTC. I’m no tax expert but I do have a kid in this situation, so I’ve looked at it carefully.
It’s not about “swapping out expenses;” it’s about making some of the otherwise non-taxable scholarship money that pays for tuition taxable so that the AOTC can be claimed. The key is that you can’t use the same dollars for more than one tax advantage. So - all of the scholarship money used for tuition can be taken tax free because it’s going toward a QEE, or $4,000 of that same money can be declared taxable and then used to qualify for the AOTC.
The AOTC can be taken only for four tax years, and the student will normally be an undergraduate (AOTC eligible) in five tax years. Look ahead. The AOTC may be more valuable for the last semester of college (last possible tax year) than it is for the first semester of college (first possible tax year). That’s how we handled it when Happykid had almost no QEE her first semester, but we could predict a much larger QEE in the last one.
Under current law, the AOTC will go away after tax year 2017. Who knows what the Congress will do, but my advice: use it while you can.
Good point MiddKid86. But back in tax year 2010 when there was no guarantee that the AOTC would be renewed, and there was only $400 worth of books as QEE, I figured it was worth the gamble. Happykid had no income that year so the family tax situation was very simple, and if the AOTC had disappeared before she finished college I would have just filed a 1040x.
I’m hoping that we will have this full paid scholarship for all four years. If so, then our QEE will be similar all four years, but next year and beyond, we will have to pay taxes on the full year of room and board instead of one semester, so adding $4000 to that amount will result in even higher taxes paid for the next few years. It will still be worth adding that additional $4000 to the total, to get the AOTC, according to my tax consultant. I just need to have more Federal taxes taken out of my paycheck to offset it at the end of the year. My DS will also be hopefully adding work study funds and earnings from a summer job to our savings to help cover taxes for next year. I’ve also heard that the AOTC might go away after 2017, so we’re going to take advantage of it while we can. I am a single parent and it has been a tough road, but getting into an Ivy League School and getting full aid was a true blessing for him. I’m just trying my best to get him through undergrad with no loans. So far so good, but there is a long way to go.
Why do you, the parent, need more federal tax withheld for your child’s taxable room/board grants/scholarships?
Mostly because I’m trying to help him as much as I can. I didn’t want him to have to work part time at the school as a freshman. I wanted him to get settled, figure out how much time he needed to allocate to his studying, and then reassess that at the end of the semester. He thinks that he can take on a part time work-study job this semester, and get a job this summer. We will save up as much as we can to pay the taxes that will be due next year, which will be substantially more than this year. I do not expect him to take on all of that expense on his own. We had to scrape together enough to pay the health insurance last August and it was tough. He is my only child and I will do whatever I can to help him get through his undergrad years without loans. After that, he will be more able to take on the financial responsibility for graduate work. His first few years? Nope. I don’t expect him to take on loans quite yet. Believe me, it hasn’t been easy. I’m certainly not well off, but I’m proud of him.
The reason I have extra federal taken out of my check is that I have a hard time saving money for taxes. I had to pay last year, so I was advised to have more taken out. Heck, my bank only pays minimal interest on savings. Might as well let the Feds hold it for me until I need it at tax time for me and the DS. If I can manage a refund, I can help him with his tax cost.
It may do you little good to increase your withholding since the income is reported on your son’s return, not yours, and you may not get the refund in time to pay his balances due April 15.
I understand what you are saying. The only reason I will increase my withholding is to get a bigger refund so I can help him pay what he owes. It’s like a Federal savings account. I know, I shouldn’t let the government have my money all year, but it helps for me to get a refund so I can help him pay his tax liability if needed. I don’t have a lot of cash flow and I don’t really miss that $50 per check extra that I have taken out.
[url=<a href=“http://talk.collegeconfidential.com/profile/438822/Debbie7452%5DDebbie7452%5B/url”>http://talk.collegeconfidential.com/profile/438822/Debbie7452]Debbie7452[/url] (and all the other naysayers who’ve yet to chime in) - You’re flat out wrong. Whether or not you like it, or think it’s fair, the AOTC is available to the families of low income kids on full scholarship to offset the tax burden of the generous scholarships those kids receive.
The AOTC likely wasn’t intended to have that effect . . . heck, think about it - the kids receiving full cost-of-attendance scholarships without loans so few and far between that it’s unlikely anyone ever considered them. Nonetheless, the law, as written, allows a family to claim the credit for all qualified expenses paid on behalf of their student, whether paid by the student, the parents, or “others.” And “others” is not limited to your Aunt Sally! Read Publ. 970 again if you don’t believe me. (Make it simple - just do a search for the word “others.”)
So all of you who have insisted, over and over and over, that the AOTC is limited to “out-of-pocket” expenses need to take a step back, reread the law, and rethink your position. You’ve done a lot of low income families on this forum a tremendous disservice.
[url=<a href=“http://talk.collegeconfidential.com/profile/100392501/Dazycrazy%5DDazycrazy%5B/url”>http://talk.collegeconfidential.com/profile/100392501/Dazycrazy]Dazycrazy[/url], your accountant has it right. [url=<a href=“http://talk.collegeconfidential.com/profile/100222967/MiddKid86%5DMiddkid86%5B/url”>http://talk.collegeconfidential.com/profile/100222967/MiddKid86]Middkid86[/url] has it right.
And those of you who are really bothered by this should crunch the numbers before you let it upset you very much . . . How many colleges in the country meet full need? Of those, how many meet full need without loans? And, of the students accepted at those schools, how many actually qualify for full cost-of-attendance institutional grants? In the end, the number of families paying less than $4,000 out of pocket is very, very few.
Dang, that was harsh. I’m far from “bothered” by anyone getting a tax credit. I am one of those people this would benefit. Everyone have a good day.
Well, this applies to our family! Son is at a meets full need, no loans school, we pay a small amount out of pocket. I just filed our federal taxes and we went by the “rules” posted here that we can only take credit for what we paid out of pocket so I’m upset that we did it wrong and did it wrong last year, too. We thought we could only take credit for what we actually paid, cash out of pocket, not the full credit.
His grant exceeds his QEE by almost $10K, by the time we adjust those expenses for what we paid out of pocket, he is paying over $1200 in Federal taxes, almost as much for California where we are residents and because he goes to school in NY, they want their share, too. I still haven’t filed his CA and NY returns because we need to find more money to pay those! Taking the full AOC credit would have brought us closer to paying those state taxes. To make matters more complicated, part of what we paid was 529 money so we know you can’t double dip and it all becomes so complicated. It seems crazy for a kid to be paying so much in taxes when he can barely buy books and pay for travel to and from college. I can’t believe that this is what was intended when the tax laws were written.
Should we have gone to an accountant? Probably but considering the size of our son’s grant it seemed impractical and we don’t have the income to shell out an extra $250 to an accountant. Many CCers warned that generally accountants don’t know about “shifting” the excess scholarship money so we didn’t even consider it. I guess we should have now knowing that we would have saved much more than an accountant costs.
If I were you I would file a 1040X (amended return) for this year and last year. Otherwise, you are leaving a lot of money on the table.