This will be the first of many financial aid/tax questions for me lol. For my own benefit, I need to keep it simple because I’m finding it all pretty confusing (and I thought I had a good math mind).
If a school gives you enough grant aid that the COA is $12,000 (out of $62,000), how do you determine what is paid for room and board, fees, and tuition? Who determines what portion of the COA has been paid from that $50K grant? I understand that for AOTC purposes room and board is not a QEE? I’ll be dealing with an outside scholarship (hopefully), a 529 payment and the tax benefit I hope.
Well, that read confusing…how do I determine if the $50K is tuition or what portion of it might be room and board, or what portion might be additional fees, etc., does that make more sense?
You’ll get an itemized bill giving the cost of each item. Unless the terms of a scholarship or grant state it must be used for a specific purpose you can allocate the grant as you like for tax purposes.
IRS Pub 970 has the details of the AOTC in Chapter 2. Chapter 1 is about scholarships/grants and when they are tax-free and when they are taxable. The amount of scholarships/grants over the cost of tuition, mandatory fees and required books and supplies is taxable income to the student. Chapter 8 is about 529 contributions and distributions.
Some key points. You can’t get multiple tax benefits, be it tax-free scholarships/grants, the AOTC or tax-free 529 distributions for the same expenses. Room and board is QEE for 529 distributions but not the other two benefits. QEE for the AOTC has to be reduced by the amount of tax-free scholarships/grants. Only the earnings part of a 529 distribution is taxable if you happen to not have QEE to cover the distribution. It matters when the school bills and credits scholarships/grants for spring semester. Taxes are by the tax year, not the school year. You must take any 529 distributions in the same tax year as the qualifying expenses are incurred/paid.
http://www.irs.gov/pub/irs-pdf/p970.pdf
If the school or outside organization do not specify the purpose of the scholarships and grants, you could choose to treat the scholarships as paying for living expenses even if the school applies the scholarships against tuition and fees.
Thank you both, that is very helpful information.