IRS credits and taxes

crazymomster · February 23, 2013, 12:25pm

I just looked on the school's website and found that for box 2 of the 1098T - that it has qualified expenses... I thought anything "required" was qualified. All it has is tuition and the $58 student activity fee... none of the other required expenses of the health center or rec center and for S, he was required to pay $125 to take a (field trip) class. That has never been on his bill... either billed or paid. He spent very little on books and some were private transactions that he has no receipt for, but could make up something if that is the way to go.

His scholarships/grants exceed "qualified" expenses by $6000. What does it take for us to get any "education" money/credits back from IRS? I presume we will be paying taxes on the $6k, right?

Also just quickly looking at another thread... so, whose taxes does this go on? His or ours? Can it go on either?

Thanks for any help.

annoyingdad · February 23, 2013, 1:43pm

Excess scholarships/grants are taxable to the student. You can’t report it on your return. They are considered earned income but the IRS. Your state may differ and treat them differently.

Fees eligible as qualified education expenses have to be required of everyone in the program of study. If the university isn’t billing for them they probably don’t qualify. Books are different, they have to be required but schools almost never bill for them. You do need receipts or some proof.

Take a look at this thread also started today for some additional info on your questions:

<a href=“http://talk.collegeconfidential.com/financial-aid-scholarships/1464596-costly-tax-mistake-re-scholarships.html[/url]”>http://talk.collegeconfidential.com/financial-aid-scholarships/1464596-costly-tax-mistake-re-scholarships.html</a>

Depending on the amounts and terms of the scholarships/grants, it may be possible to shift more of your daughter’s free money to non-qualified expenses, have her pay tax on it, and you use the qualified expenses for the AOC.

But it’s complicated and you need to know what you are doing.

SimpleLife · February 24, 2013, 1:07am

Hi crazymomster. I’ll try to tackle a few of your questions.

First,

Here is a link to IRS Publication 929, Tax Rules for Children and Dependents:

I find it very easy to read and follow, and I hope that you will, too.

If the link doesn’t work for you, just google IRS Publication 929 or go to the irs.gov website and use the publication search feature to find 929.

You can use the first few pages of that publication to determine whether your son will have to file his own taxes. If he doesn’t HAVE to file his own taxes, then you can include his non-taxable income on your taxes or he can file his own taxes and report it himself. You get to choose whichever way is most advantageous to you, as long as it complies with the IRS rules.

We always try each way that the law allows for each kid. We ultimately file the way that is cheapest for the family as a whole. In our case, each year, it has been cheaper for the family as a whole if the kids file their own taxes while I claim them as my dependents (meaning they can’t claim their own exemptions). YMMV.

If your son is required to file his own tax return IAW Publication 929 (as my major scholarship recipient kids are since their nontaxable amounts put them in that ‘bracket’), then obviously, he must report these things on his own taxes. That does not mean you can’t claim him as your dependent and take the exemption for him.

As for the amounts on his 1098T:

The number reported in box 2 on the 1098T is not necessarily the number your son has to use when figuring his taxes. In fact, in my kids’ cases, that number has never accurately reflected their true ‘qualified expenses,’ and it has never been the number they used when figuring non-taxable versus taxable scholarship amounts to report.

There are 2 reasons for this.

One is the presence of an ‘x’ in box 7 on the 1098T.

If your son likewise has an ‘x’ in box 7 of his 2012 1098T, then the amount in his box 1 or box 2 includes money from the first three months of the 2013 tax year. Your son’s 1098T will have some sort of detailed report showing him/you which expenses were billed (box 2) or paid (box 1) in which tax year. We have chosen to report only qualified expenses that we actually PAID in that tax year, as opposed to the way the kids’ institutions report the monies on their 1098T’s. It will all come out in the wash eventually and all monies will eventually be reported on each of my kids’ taxes. But we do keep the tax years strictly separate – reporting money spent on qualified expenses in THAT particular tax year only, despite what the 1098T reports. There’s nothing wrong with doing it that way.

Another reason that my kids have never used their box 2 amounts is that their reporting institutions have no way of knowing what their actual qualified expenses are in order to report them! For instance, the schools have no idea what my kids have spent on their textbooks, supplies, or equipment for their required courses. But all of those things are qualified expenses. So, my kids keep their receipts and use their actual expenses to report their scholarship (‘SCH’) amounts on line 7 of their 1040s (or line 1 on 1040EZ’s if that’s something your kid can file). (You’re familiar with HOW to report non-qualified expenses as income, right? That’s on page 6 of IRS Publication 970, Tax Benefits for Education 2012 – ‘Reporting Scholarships and Fellowships.’)

Here’s a link: <a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a>

Speaking of IRS Publication 970, you can also consult it for more guidance about the various Tax Credits (American Opportunity Credit & Lifetime Learning Credit) as well as Education-related Deductions. Making these determinations is a lot more complicated than figuring taxable versus non-taxable scholarship amounts and determining whether or not your son has to file his own taxes. Again, you’re allowed to file in any way that is most advantageous to you and yours – as long as you follow all IRS rules and guidelines. The hard part is figuring out which way is most advantageous! There are so many permutations and the various computations are all wrapped up in whether or not you claim him as your dependent on your own taxes and how that will impact your taxes and his. You’ll see all of that outlined in Pub 970.

Best of luck with all of this! :)

annoyingdad · February 24, 2013, 9:43am

I’m confused why non-taxable income would have to be included on anyone’s return.

But regardless of that, you don’t get to choose when it comes to earned income for a child. If a child has enough earned income to be required to file, they must file their own return to report it. Taxable scholarships/grants are considered earned income by the IRS. Your state might treat them differently.

That’s from Table 2 of pub 501:

SimpleLife · February 24, 2013, 10:45am

^Whoops! You’re right, annoyingdad. I MEANT “taxable income!” I actually said “non-taxable” twice, I now see, when I was THINKING “non-qualified” (or taxable). It was late. :o My mistake!

As to the rest, I concur. That’s why I posted the link to the IRS publication. I think it makes it very clear whether or not your child has to file his/her own taxes. If he has to file his own … then he must file his own.

And I concur that scholarships are considered “earned income.”

I have been told and have read that it can be advantageous for some families to include a student’s financial data on the parents’ taxes in order to claim certain credits and deductions. For my family, it has never worked that way. It has always been most advantageous for me to claim their exemptions as my dependents and for them to file their own taxes to report their earnings and scholarships. It will all depend on your particular circumstances as to which way is most advantageous for you.

annoyingdad · February 24, 2013, 11:29am

Well, it just can’t be done, there is no choice, earned income has to be reported by the child if there is enough to be required to file. But there is a lot of bad info out there.

Generally parents will claim the exemption, the student indicates they can be claimed by someone else. Parents can still take the AOC based on qualified education expenses they or the child pays(such as through student loans).

SimpleLife · February 24, 2013, 12:55pm

^We may not be understanding each other here, annoyingdad. It can be done and has been done. It is done by some when the student is not required to file. That can happen when the full-time student is under age 24, has less earned income than necessary to file, and has unearned income that requires that student to report that unearned income. There is an option in place for that student’s financial data to be reported on the parents’ taxes, and if the parents and student elect to take this option, the student does not have to file. All eligible credits and deductions will still apply, and the parents can take the exemption for their child. I can’t imagine why you would say this just can’t be done. It can be done.

I have no disagreement and have said several times myself that IF the student has earned income that exceeds the designated amounts (for instance, the taxable portions of scholarships), then that student must file their own returns. Sometimes, the student has scholarship ‘earned income’ that does NOT require filing but is still an amount greater than tuition, fees, and books. That student may also have unearned income that requires reporting. And the amounts of both types of income may fall into that category that permits the parents to report that student’s data in lieu of the student. One of my own kids has been in this boat in the past. He still filed his own taxes because it was more economically advantageous for us as a family. But, supposedly, it CAN be more advantageous for other families to include that kid’s data on the parents’ taxes.

Does this have anything to do with your screen name? ;)

SimpleLife · February 24, 2013, 2:14pm

^The reason I went to the trouble of mentioning this option in the first place is that the OP’s son just may fall into that special category. If, right now, his box 2 amounts, with no adjustments, result in non-qualified expenses (taxable income) of $6000, as OP reports, then it could be that after taking his actual numbers into account and allowing for books and school supplies, etc, he may fall below the amount that requires him to file.

If he falls below that amount (I’m just assuming its the $5950 for him), BUT he still has unearned income that would otherwise require him to file, he may be able to take that special election whereby his parents report his financial data on their taxes, and he forgoes filing.

annoyingdad · February 24, 2013, 2:46pm

Please clarify what you mean by ‘student’s financial data’. Earned income is never reported on the parents’ taxes.

Parent’s Election To Report Child’s Interest and Dividends 

You may be able to elect to include your child’s interest and dividend income (including capital gain distributions) on your tax return. If you do, your child will not have to file a return. 

You can make this election only if all the following conditions are met. 

Your child was under age 19 (or under age 24 if a full-time student) at the end of the year.

Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).

The child’s gross income was less than $9,500.

The child is required to file a return unless you make this election.

The child does not file a joint return for the year.

No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child’s name and social security number. 

No federal income tax was taken out of your child’s income under the backup withholding rules.

You are the parent whose return must be used when applying the special tax rules for children. (See Which Parent’s Return To Use, earlier.)

Both quotes are from pub 929:

[Publication</a> 929 (2012), Tax Rules for Children and Dependents](<a href=“http://www.irs.gov/publications/p929/ar02.html#en_US_2012_publink1000203800]Publication”>http://www.irs.gov/publications/p929/ar02.html#en_US_2012_publink1000203800)

With both earned and enough unearned income the threshold for filing is much lower. The second quote shows that if a dependent has $650 of earned income and at least $301 of unearned income they have to file a return. Under that or under $951 if all is unearned income, neither the dependent or parents need to report anything.

$1900 of unearned income gets you into the kiddie tax but that too only applies to unearned income.

CTScoutmom · February 24, 2013, 3:06pm

Crossposted with Annoyingdad

the student in question doesn’t qualify, because there is income other than interest and dividends. Even if the student didn’t work.

It can be advantageous for parents to claim the student on their taxes as a dependent, which allows them to claim credits. In fact, if they CAN claim the student, the student is not in fact allowed to claim his own exemption. The question of a choice comes into play only if you’re at a point where there is a question of whether the student provided more than 50% of his own support. If not - the student is a dependent.

The benefit of reporting the student’s interest and dividends (if allowable) is in not having to file a separate return. When a child does file such a return, the resulting tax is generally the same whether additional tax on the parent’s return, or tax due on their own, due to the kiddie tax.

crazymomster · February 24, 2013, 7:33pm

Oh wow, this is all so much fun :-)

S will definitely be filing taxes as he has 1099 income of around 5000 (not all of that is actually on a 1099, but it is all self employment income) and he will have 6000 of scholarship income.

S’s books and equipment expenses are probably around $500. He will have other deductions related to the self employment income.

All 1098T info comes only from fall of 2012.

S will be our dependent.

Thanks :-)

happymomof1 · February 24, 2013, 7:51pm

Was fall 2012 the first semester of college for your son? Remember that most students are in college for four academic years, and those are spread over five tax years. You can claim the AOC for any four if those five tax years. If there weren’t many expenses that qualify for the AOC in tax year 2012, but you can reasonably predict that there will be more in tax year 2016, you can skip claiming the AOC this time.

crazymomster · February 26, 2013, 12:00am

Ah that is helpful news. I think I already knew that, but didn’t think of it. I imagine that future years will have more expenses and less scholarships.

Thanks.

collegeparents · February 26, 2013, 12:46am

Just be careful…box 2 eligible expenses

Eligible expense for the AOC are not the same as eligible expenses for 529 withdrawals.

MomCat2 · February 26, 2013, 12:53am

Actually, it may not be so easy to claim the AOC for that fifth year, i.e. the calendar year that includes the last semester (or last 2 quarters) of your child’s senior year. If the child does not live with you for more than half of that year, then s/he would not qualify as your dependent for that year and you would therefore not be able to claim the AOC.

Here are the criteria for being a “dependent child”:

In general, to be a taxpayer’s qualifying child, a person must satisfy four tests:

<pre><code>Relationship — the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these.
Residence — has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.
Age — must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.
Support — did not provide more than one-half of his/her own support for the year.
</code></pre>

[A</a> ?Qualifying Child?](<a href=“http://www.irs.gov/uac/A-“Qualifying-Child”]A”>http://www.irs.gov/uac/A-“Qualifying-Child”)

Lets say s/he graduates in early May. Now, the months from Jan. through May would be enough to categorize the child as a student for that year (“a full-time student for at least five months of the year”), and you could count the child as living with you up through graduation, since the time she was at school would be considered a “temporary absence” for education. BUT - if she started a job right after graduation where she did not live with you through July 2 (half of the year), then you could not count her as your dependent for that year.
Having your non-dependent child (instead of you) claim the AOC for that year gets tricky, and she may not be able to claim the refundable part of the credit:

Refundable Part of Credit

Forty percent of the American opportunity credit is refundable for most taxpayers. However, if you were under age 24 at the end of 2011 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part IV) will be used to reduce your tax as a nonrefundable credit only.

You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.

<pre><code>You were:
Under age 18 at the end of 2011, or

Age 18 at the end of 2011 and your earned income (defined below) was less than one-half of your support (defined below), or

Over age 18 and under age 24 at the end of 2011 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).
At least one of your parents was alive at the end of 2011.

You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2011.
</code></pre>

Earned income. Examples of earned income include wages, salaries, tips, and other taxable employee pay; net earnings from self-employment; and gross income received as a statutory employee. Statutory employees include full-time life insurance agents, certain agent or commission drivers and traveling salespersons, and certain homeworkers.

Support. Your support includes all amounts spent to provide you with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your support, count support provided by you, your parents, and others. However, a scholarship received by you is not considered support if you are a full-time student. See Publication 501 for details.

Full-time student. You are a full-time student for 2011 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency.

from [Publication</a> 970 (2011), Tax Benefits for Education](<a href=“http://www.irs.gov/publications/p970/ch02.html]Publication”>http://www.irs.gov/publications/p970/ch02.html) (note that this is from the 2011 version of Pub. 970 - the rules have not changed, but you should adjust the year mentioned in the above quoted portion accordingly.

CTScoutmom · February 26, 2013, 6:57am

True, but if the student leaves home before July 2nd to start a fulltime job, he is likely to meet the support test. As a parent, I would insist the student live at home through June if he didn’t have a job yet, to preserve the ability for someone to claim the AOC.

annoyingdad · February 26, 2013, 10:03am

How is a student who starts a job in June likely to meet the support test? And they still won’t meet the residency test if the job is away from the parents’ residence.

This is a bet that has to be taken after first semester freshman year and if taken is betting on the student not finishing in 4 years or not getting a job right out of college. In some circumstances it may be known it will take more than 4 years but we all hope our kids get jobs right away.

MomCat2 · February 26, 2013, 12:52pm

CTS, annoyingdad is right –
To reiterate, per IRS rules, for your child to be considered a dependent as a “qualifying child”, ALL FOUR tests must be met: Relationship, Residence, Age, and Support.

charlieschm · February 26, 2013, 3:28pm

Why does the country even bother with 1098 forms if the numbers shown on it don’t relate to actual eligible expenses for tax purposes for a calendar year?

happymomof1 · February 26, 2013, 3:33pm

Happykid had a full tuition and fees scholarship for the two years at community college. This meant that our qualified expenses that first semester were only about $400 for books. I’m willing to take my chances on somebody being able to collect on at least part of the AOC for her last semester. But I do agree that for many families the better strategy is to start claiming the AOC immediately.

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