Very useful info from the IRS about Pell (and potentially other) grants are allowed to be used for R&B and how that can allow a parent to claim the AOTC. Often the amount that is taxable to the child as income is not as great as the AOTC credit for the parent.
Worth a look if your child is Pell-eligible.
https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Pell-AOTC-Interaction-2014.pdf
Can someone explain how this works to me in terms of how taxes are filed. I understand what they’re doing, but I’m a little confused on how it works from a practical aspect.
Say there was a student that received 9K in grants/scholarships for 7K of QEE, so he would be the one that included the 1098-T and have 2K added to earned income. If he wants to move 4K of that grant money over to room and board, how does he do that? Does he alter what is included in the 1098-T? Then does the parent also include the 1098-T with their return to get the AOC?
The 1098-T is for information only. You do not change it.
For your ^^ example, the student must include $2k of taxable scholarship received and pay taxes on that. If the parents would like to take the AOTC, the student can claim $6k of taxable scholarship money.
The parents don’t use the 1098-T, just the amount the student actually claimed, or here $6k on the right schedule (is it still 8516?}
I used tax programs like turbotax and tax act and they’d ask the questions, like “What is in box 2 of the 1098=T” and then “what did you actually pay for QEE” or something, and basically you are just ignoring the 1098-T and putting in your own figures.
We just put the amount that pays for room and board where it asked if any scholarship paid for room and board, in the TurboTax education interview, and that made it taxable for the student.
The amount paid for QEE and claimed for AOTC is handled on the parent return.
But in this example, the parents didn’t pay anything for QEE but want to declare some of the QEE as taxable to claim the AOC. The student has to declare and pay taxes on that on her return, then the parents can claim the AOTC as if they HAD paid the QEE.
I always had to do my returns and my kids’ in tandem to get all the info right on all three returns. Now I’ve dropped the kid but picked up my mother’s return. I feel like tax season goes on forever.
@twoinanddone Thank you. The software programs were what I was worried about since I was assuming they would just have you inputting the boxes from the 1098-T. Letting you override them makes sense.
It takes some time to figure out how to move the QEE into taxable but it can be done. What really helped me was to know what the answer should be, like “the 1098 says there is $2k of taxable, but we want to make it $6k” so when you put in the numbers you want them to come to $6k. It’s easy to reverse it because of how things are worded.
I recently read an article that said a student’s grant/scholarship money can be “allocated” however you decide (as long as the grant isn’t earmarked for something in particular). So you can intentionally allocate to R&B to qualify yourself for the AOTC credit, just as the article in the OP says.
@cshell2 Non-QEE scholarship funds are actually taxed as unearned income at the new Trusts and Estates rates. Sec. 1(j)(4)(B) of new tax code. However, taxable scholarships are counted as earned income for the purpose of computing the standard deduction.
Our state grant (PA) can be used for room and board, and Pell grant can as well, some scholarships are restricted in their use, and some state grants are only applicable towards tuition (TAP).
You also don’t have to maximize the whole AOTC of $2,500 and make $4,000 of grants/scholarships taxable.
You could make $2,000 taxable in addition to the $2,000 that’s already taxable and still get a $2,000 AOTC, since the first $2,000 of QEE results in a 100% AOTC.
I’m pretty sure our state grant (MN) can be applied to room and board, but I’m having trouble finding that written anywhere.
It does depend upon the state. NY makes it difficult to get room and board paid.
My daughter had a mix of scholarships and grants, and some had to only be used for tuition but the school made sure those amounts were applied first. It would only matter if the amounts that only could be used for tuition cover 100% of tuition. The few grants that had to be used for tuition did not cover 100% of tuition so I could easily move some tuition/QEE to the taxable column
The IRS is not going to read the fine print of your awards. If you can’t find a restriction, I’d assume an award can be used for any academic purpose. The 2-3 we had that were ‘tuition only’ stated that right up front. IRS hardly ever objects to people declaring income as taxable.