And while you are at it, find out if it is possible to file amended state returns as well.
Make sure you run numbers both ways, with more taxable scholarships versus the way you filed with just out of pocket expenses. Because your income may limit the amount of AOTC you can claim.
@Dodgersmom I agree with you and have been saying it for years on CC. Usually the naysayers jump on the bandwagon and overtake the thread with their arguments that I am wrong.
[Debbie7452[/url] - My apologies. I’m frustrated with all the bad advice that’s been given on this subject, but if it seemed like I was taking it out on you, I apologize.
The problem is that the treatment of “paid expenses" is counterintuitive. It doesn’t make sense to get a credit for money that one didn’t actually pay oneself. As someone posted a year ago, "If you get free window for your home, you can’t then take the credit for energy improvements. You are getting the credit because you paid something, thus getting the credit.
What everyone needs to recognize, though, is that the treatment of scholarship monies isn’t dictated by logic, but by the tax laws. Which means that a small handful of families who paid less than $4,000 out of pocket for college expenses can still qualify for the AOTC. And thank goodness for that . . . even if it does seem illogical!
By the way, kudos to [url=<a href=“http://talk.collegeconfidential.com/profile/100392501/Dazycrazy]Dazycrazy[/url]’s”>http://talk.collegeconfidential.com/profile/100392501/Dazycrazy]Dazycrazy](http://talk.collegeconfidential.com/profile/438822/Debbie7452)’s accountant for figuring this out - he or she is apparently one of the select few who actually understands the interplay between taxes and college expenses!
I would not amend any state returns because the AOTC is a federal credit, unless the state return has a subtraction or credit for tuition (Wisconsin has a subtraction).
I suggest just amending the child’s federal return to pick up additional income so that there is up to $4000 of QEE if you can the full $2500 credit (including amending Form 8615), and amend the parent’s return (including Form 8863) to get the increase in the allowed AOTC.
Then, update the FAFSA.
Thank you, dodgersmom! When my accountant first presented it to me, it just didn’t seem right and logical. She kept sending me paragraphs from the IRS rulings and insisted that it was OK. She even kept telling me that the IRS even explains it and gives tips on how to do it. Now I’ve come to terms with it, because we did have to pay over $4000 for the year for health insurance and fees. The way the school bills us, it just lists all of the charges, notes the scholarship amount and there is a balance due at the bottom. I can justify it in my mind to say that we paid that money for tuition and the school paid for the other stuff. We pay taxes on the room/board, plus the amount that we paid the school and we get the AOTC. Thank you for making this clear because I think it will help a lot of people in the same situation as mine. It’s confusing, especially for parents with first year students. Now I know what to expect and my son and I can save all year to pay our taxes next year.
fidoprincess, I hope that you can get your returns adjusted. It sure made a huge difference for us!!
Madison, many states base their returns off the federal returns (pay a percentage of fed AGI) so if the fed returns change, the state returns change.
Once I had bad SSN for my daughter, so the feds disallowed all deductions and credits for her. I straightened it out with the feds. Three years later, I get a bill from the state, with penalties, saying my state tax was wrong based on my federal return. So then I had to get a transcript from the fed taxes to show that my original return was correct.
It will depend on which state the filer live in.
True, it depends on the state.
Maybe, maybe not. A change in the AOTC won’t affect federal AGI, because the AOTC is factored in after AGI is determined. So if a state tax return is based strictly on federal AGI, it doesn’t matter what happens with the AOTC, as far as the state return is concerned.
Yes, and my deductions and exemptions didn’t affect my AGI either, but the state taxes were based on a bunch of things because my state gives most of the same credits as federal, and apparently taking the child credits mattered. Maybe it won’t matter on the state income taxes, but if it does (or might) you should also amend the state return.
The difference wasn’t a lot, maybe $20-30, but there were penalties and interest so it was about $100.
@middkid86 I was trying to refer to the child’s return, not the parents…if the child amends to pick up more taxable income - I am suggesting that if there is no state deduction or credit, then the scholarship/grant income be treated as fed-taxable only, not state.
Yes, of course if the student has already filed a state tax return and then goes and changes taxable income, an amended state return should be filed. But I don’t see how the same scholarship/grant dollars can be treated as taxable for federal purposes but not-taxable for state purposes.
They are taxable for federal to prevent double-dipping. If there is no state deduction or credit, there is no state double dipping if those dollars are federal-taxable only.
The state tax returns that I am familiar with start with federal AGI, and make additions/subtractions/deductions based on state tax policy in order to come up with the state tax owed. There is no opportunity to classify income in a different way than it was classified on the federal return. Perhaps there are states that allow a taxpayer to do that.
It reminds me of the tip credit or the R&D credit - where for federal you have an add back to income because you are taking a credit, but for state since there is no credit you DO get to deduct those expenses.