My kid has total grants/scholarships of say 60K and QEE of 50K. He has to pay tax on 10K not qualified expenses of room and board. We paid $3150 cash and $3000 529 money to the school and for books, We know the 529 money can’t count toward the AOC.
Normally, we would have son pay taxes on the 10K PLUS the $3150 and then we would take the AOC for using $3150 which of course doesn’t get us the full credit. However, last year there was some talk that he could reduce the amount of QEE (ie. pay more tax on scholarship) for the additional $850 that would allow us to take the full credit of $2500 on $4K of expenses.
The interpretation was that a grant or scholarship was money paid on behalf of the child from ANY source but before we thought it had to be paid by us out of pocket or by a relative, etc… not by the school. The argument was that Pell is paid by the govt and people can use that money to get the AOC credit so why not a school’s grant. Some people mentioned that they paid nothing at all to the school and still took the full AOC by having child pay more tax on scholarship/grant money.
Does anyone know the real answer? Can son pay more tax so we can get more credit? I’ve done all the taxes both ways and we will come out ahead as a family if we can use the full AOC credit even though he ends up paying more taxes.
I really need to get this right since this tax return will be used for 2 years and I also have a high school junior so this return will be used by her applying for colleges and her first year of financial aid, yikes! Thank you in advance for your help and opinions.
The Pell grant counts as a grant (duh) and cannot be used as payment for QEE costs and still count those as ‘paid’ toward the AOTC. Just count the Pell money with all the other scholarships and grants.
Take the 529 funds out of the equation. You used those for r&b and that’s fine, and not taxable, but if you received 529 reimbursement for books, don’t add those back into QEE. Take the total QEE (tuition, fees, books not paid for with 529 funds) and subtract the grants and scholarships. What you have left is the amount your child has to declare as taxable scholarship. If that number is $10k and you want to take the AOTC, he could declare $140k as taxable scholarship and you could take the AOTC.
Just because you actually paid $3150 to the school doesn’t mean it was all for QEE. Some of it might have been for r&b, fees outside QEE (transportation or insurance). The final $2000 of the AOTC is only a 1/4 credit, so it might not be beneficial to have son declare the extra $2000 for you to get a $500 credit.
Although FAFSA is using the 2015 taxes twice, the IRS isn’t. It’s really a small difference, especially if your children aren’t qualifying for Pell grants.
He didn’t get a pell grant. I was just using that as an example of someone who can take the full AOC without paying $4000 out of pocket.
His grants/scholarships are not given in a way to “only” pay tuition or QEE. Like the Pell grant in the publication above, he has a choice in how to allocate grants/scholarships for tax purposes.
Can he choose to pay tax on more scholarship money ($850) so we can take the full credit even though we didn’t pay the $4000 out of pocket, only paid $3150,
If I am reading the above publication correctly, he can, right? It says “However, IRS regulations provide that the student may treat scholarship funds to have been used for non-QTRE such as room and board, simply by
including the funds in income, as long as the scholarship is allowed to be used for non-QTRE expenses,”
So the old saying of you can NOT get credit for more than you actually paid out of pocket is wrong?
What “old saying”? Unless the grants/scholarships that he received specifically restrict their use to paying only tuition, in my opinion (for what it’s worth) he can claim that some of it was used to pay non-QEE, thereby increasing the out-of-pocket QEE expenses.
But you can’t get the AOTC for QEE paid for with pell money. That’s what we’re saying. You’re asking if AOTC has to be actual cash money paid to the school OOP. No, it doesn’t and you can declare certain scholarships as taxable and take the AOTC.
Even if you paid $3150 to the school, that doesn’t mean that is what you get to claim in AOTC. Some of that money, even if you paid OOP, might have been for r&b. You really need to do add up all the QEE (not counting 529 paid for things), then add up all the scholarships and grants, and subtract. A positive number means you can use it for AOTC, a negative number is taxable. Even if negative, you can shift some of the QEE to taxable scholarship, and take the AOTC.
Thanks to all of you for your replies. Twoinanddone, this is the answer I was looking for: “You’re asking if AOTC has to be actual cash money paid to the school OOP. No, it doesn’t and you can declare certain scholarships as taxable and take the AOTC.” There is no pell and there are no restrictions on how the scholarship money is used so it’s legal to shift more scholarship money to the taxable side. I can actually shift the additional $850 to taxable scholarship money to enable us to take the full AOC even though we only paid the $3150 out of pocket. This topic came up last year and we had already filed but I was too scared to amend the return for the little bit of money and also being unsure of how the rules worked. Many people here said you could not get credit for money you didn’t actually pay out of pocket.
I added up all the grants (60K) then subtracted the QEE(50K) to have taxable amount of $10K. Then I reduce the QEE by $4k and add that to the taxable amount so the kid is paying taxes on $14K and we can claim the entire AOC, sounds right? We leave the 529 out of the picture because you can’t double dip but for the rules of 529, that can “go” to room and board.
Yes, thumper, very expensive school but look at the grant amount they gave my child to allow him to attend, expensive but generous and the figures are actually higher but I rounded them off for an example. I will say that the airfare cross country is killing us though. We never budgeted for such increases. First flight 2 years ago was ~$125 each way, this year winter break almost $700 and Spring break almost $500 but it’s cheaper to come home and eat since they close the dining halls!
I will say we had no idea that we/son would be paying this amount of taxes when the kid started. It was just not something we knew about. Taking the AOC is the only way to pay son’s taxes, we have to file our return, wait for the refund and then file and pay son’s return with that money. He also pays a large amount to the state he goes to school in as well as state tax where we live although our state does credit him for out of state tax. Many of his classmates don’t even pay the state tax on their grants so sometimes I feel foolish but I know it’s the law even though I can’t believe it was meant to “punish” kids who get big grants. The taxing at the parents rate is another thing that I don’t think was well thought through for kids like mine but no getting around that, either.
Thank you all once again! I really appreciate your help. I ran this both ways and in the end, we only save about $50 but more importantly, I want it to be right since we use this return for two years and for my high school junior so thanks again.
As I understand it, you can only use QEE for the AOTC if the QEE was not paid with “tax advantage money”. Generally, “tax advantage money” is the tax free portion of scholarships (scholarships, grants (Pell, SEOG, institutional grants)) and distributions from plans like a 529. By declaring part of the tax free scholarship as income you are removing the tax advantage and therefore can use the QEE paid with the now taxable scholarship.
As mentioned above, this only is allowed if the scholarship is not restricted to paying tuition only.
I didn’t count the $3000 529 money at all. I didn’t include it in the extra taxable scholarship income so that’s okay to do right? I am shifting scholarship funds to the taxable portion.
Well the way I see it you asked if in addition to the $3150 your son could include another $850 as taxable scholarship in income so that you can claim full $4000 for AOTC.
The additional $850 times 25% would get you $212.50 more in education credit ( provided you qualify with your MAGI).
But how much more tax would your son have to pay? $850 at a parent tax rate of 25% would be the same $212.50.
It could be a wash, worth it or not. Check into that.
Does your son have other income? As your dependent he will get a $6300 standard deduction.
Everything over that from taxable scholarships will be considered net unearned income and subject to kiddie tax figured on form 8615.
For clarification, the standard deduction for a single person who can be claimed as a dependent on someone else’s taxes is the greater of $1,050 or earned income plus $350, up to a maximum of $6,300. For the purpose of figuring the standard deduction, earned income includes taxable scholarships and grants.
I have a similar situation with my daughter. Scholarships, grants and stipend (counts as scholarship money) way exceeds qualified expenses. We did shift some extra scholarship over to taxable but I can’t see how you can shift over more than what you actually paid out of pocket?? If you are claiming the excess money was used on non-qualified expenses how did the qualified expenses get paid for? I claimed the AOTC for the amount I have proof that I paid to the school and for books.
It doesn’t really matter where the money comes from, it just matters whether or not it’s “tax advantaged.” If you declare some of the otherwise tax-free scholarship money as taxable income, it’s no longer tax advantaged and you’ve freed up some money to take advantage of the AOTC.
As an example, let’s say that your kid gets a 100% full ride, with everything covered. You have no out-of-pocket expenses, and your kid must claim as taxable income any amount over the qualified fees, tuition and books. As long as the terms of the scholarship don’t restrict it, your kid can declare an extra $4k to be taxable income, pay the additional tax on that amount, and the parent can claim the full AOTC.
Dragonflygarden, you can shift more to taxable. That’s the question. See Pub 970.
mommdc, I think the example is confusing, and that r&b actually cost more than $10k but $10k of the scholarship was used for r&b. Some of the r&b was paid with 529 funds so not included in this example, and $3150 was actually paid to the school, so R&B (and ‘529’ books) was probably about $16,150. That money has been zeroed out of the total.
So total scholarship $60k
Total QEE $50,000 (no books)
Taxable scholarship claimed $14000 to allow $4000 AOTC (only claiming $46k of QEE paid with scholarship money)
From what I’m reading you can only claim money that is actually out of pocket (including loans). You can’t use scholarship money, make it taxable and still take the credit for what the scholarship money paid for. I think OP can only claim the $3150 they actually spent.
Also the student would have to claim the $10k excess and the $3150 shifted money.
“But by shifting some of the aid so that you pay $4,000 worth of tuition, fees, or book costs out of your own pocket, you can get the maximum benefit from the AOTC.”