I have been thinking about next year’s taxes and how best to claim the AOTC and how much of scholarships I need to include in D’s income.
She has a scholarship that covers tuition. So I know I can only deduct mandatory fees and books for AOTC. If I pay fall bill in Aug and spring in Dec I should have two semesters of fees and one of books I think, so maybe $1,500
For the scholarships she has $2,500 and $1,700 state grant for the year (it should post to the account in July and Nov), that will be added to her income from work of about $2,000.
You probably don’t have to pay the spring tuition early.
Say her tuition is $10,000, books $500, fees $500 per semester. That means she’ll have $11000 in QEE. Her scholarships and grants are $1250 and $850 per semester, so for 2015 she’s received $12100 and can only exclude $11000, must declare $1,100. BUT you can declare more of it taxable if you want to to get the full AOTC. If she declares $5,100 as unearned scholarship income, you get to take the AOTC and receive a $2500 credit. She’ll pay taxes on $5,100 plus $2000, so $7,100. She’ll get a $6300 standard deduction, and pay taxes (probably at your higher rate) on $800, or probably about $200 - but you get $2500!
If you move the spring semester charges to the fall, you’ll be short next year. I chose not to move the spring charges because for 2016 taxes, you’ll have 2x the scholarships (spring and fall). Next year is going to bite for my daughter paying the taxes on 2015 financial aid. No free lunch with the IRS.
Happykid’s scholarship meant that it made no sense to claim the AOTC for the year she started college. It was claimed in the next four tax years instead.
@twoinanddone, thanks for your input, but I don’t understand what you mean. I’m not claiming tuition at all because it’s covered by the scholarship. I will claim the fees for both semesters and books as QEE. That will give me an AOTC of $1,500 for 2015.
I have to pay the bill in Dec anyway, might as well get a bigger credit.
As for the outside scholarships and grant, they will pay for room and board, so they are taxable.
So I should get $1,500 AOTC for QEE of books and fees. And D should not owe any tax since she should be under the standard deduction amount.
Since the tuition scholarship is specifically for tuition I don’t think I can include more as taxable.
@happymomof1, it just depends I guess. D just has the outside scholarship for the first year. But bills are due Aug and Dec so I will have a years’ worth of expenses for 2015, 2016, 2017, 2018
The AOTC is a percentage credit. If you have $4000 in paid QEE costs, you get a $2500 credit. If you have $1500 in costs, you will not get $1500 in credit. There is a worksheet to calculate the amount you will get.
@twoinanddone FYI the AOTC is 100% of the first $2000 so the OP will get a $1500 credit on the first $1500 of QEE provided other requirements are met. Refer to IRS Publication 970.