<p>growells - I recognized this dilemma when I first did a quick look-see at your numbers last night and saw that there was quite a bit of “excess” (ie potentially taxable) scholarship in the the spring semester but none in the fall semester.</p>
<p>The “by the book” way to do it would be your Method 1, applying each scholarship separately to the semester for which it was intended/earmarked. Adding the taxable scholarship of $5104 to your daughter’s 2012 summer job income of $2348 gives her a total 2012 income of $7452. Subtracting out her standard deduction of $5950 gives her a taxable income of $1502 - since this is in the 10% bracket, she’d owe taxes of about $150. (my brain’s a bit fuzzy tonight, so I hope my math is correct.)</p>
<p>If you used your Method 2 (which would result in no tax owed by your daughter) and were audited, whether that method stood up or not would probably depend on how bright and/or detail oriented the auditor was. I think a lot of this educational tax stuff is very poorly understood out there, even by some tax preparers (based by posts of people here, and by my reading of that tax preparers’ discussion forum that I gave 2 quotes from in my lengthy post above) and even by IRS personnel (based on what people here at CC have said about their phone calls to the IRS with questions on these issues). A careful examination of the school’s account records for your D (if that’s what the auditor requested) would show that there was taxable scholarship income for the spring semester. But if the auditor didn’t look closely, or if you were able to present him/her with data that glommed both of the semesters together instead of a detailed itemized record of her account for the entire year, Method 2 might fly just fine. </p>
<p>Remember that you qualify for the full AOC for 2012 either way (depending on MAGI level and other details, of course).</p>
<p>And, hey, by linking up the scholarships with the semesters to which they belong instead of the cockamamie 1098T non-method, you avoid the nightmare of having to re-do your D’s 2011 return and your D owing additional tax on thousands and thousands of mis-allocated scholarship funds. You also avoid potential bizarre scenarios in her senior year.</p>
<p>MomCat2, Well, I think that some of the confusion between the two different calculation methods mentioned in my previous post stems from how worksheet 1-1 of P970 is structured & worded. It instructs you to “Enter your scholarship or fellowship income for 20xx.” Most people would interpret that to mean to enter the “total for all scholarships/fellowships for 20xx.” Also, it instructs you to basically enter “the tax-free part of your schiolarships or fellowship income” on line 6. Therefore, method 2 is the method worksheet 1-1 implies should be used. Don’t you think?</p>
<p>I personally think that worksheet 1-1 of P970 is over-simplified & misses important details that are outlined throughout the rest of P970. Especially the details about meeting ALL conditions of the scholarship(s)/fellowship(s). But who am I to argue with the IRS? </p>
<p>Also, I do remember reading something somewhere in P970 that seemed to imply that a taxpayer may apply scholarships and/or payments to a certain/specific school term rather than strictly using dates credited to the account & applying them strictly to the tax year. But I am a little fuzzy on the wording & not certain. I think if you were to search P970 for the word “deemed” you might find it.</p>
<p>MomCat2, Another question that has been weighing on my mind. If for some very bizarre reason I decided not to apply grandpa’s check, that was credited to D’s account on 12/31/12, towards the 2012 AOC, would I be able to apply it towards the 2013 AOC(if it is reinstated by congress) instead? I am a little fuzzy on whether a payment credited on a date in the “previous”(2012) tax year can be used during the “current”(2013) year if it was intended to be used for the school term at the very beginning of the “current”(2013) year. Or, does the actual date of the payment override the intention of the payment in this case? </p>
<p>Do you know the answer to this one? I am trying to determine if I would even be able to use it towards a tuition credit in 2013 if I chose. Although, I doubt that I would, it has still been nagging me.</p>
<p>growells- I remember seeing that worksheet in Pub. 970 the other day and thinking that it wasn’t exactly precise or detailed. I guess you could go ahead and use your Method 2. In the only-very-remotely-probable scenario that you/your daughter were audited <em>and</em> drew a persnickety auditor, you might be forced to cough up the extra 150 bucks. In that case, you could likely avoid any penalties with the “acting in good faith” argument - “Hey, I was using you guys’ worksheet!”</p>
<p>In terms of your other question, the only thing that seems to matter in terms of payments and using them to qualify for the AOC or other credits is the date the payment was MADE. The payment must have been made in the same calendar year as the year for which you seek the credit. You may be thinking of the language which says (paraphrasing) you can use “payments <em>made</em> in 2012 for an academic term beginning in the first 3 months of 2013” when you are seeking a credit for 2012. Bottom line, grandpa’s payment was credited in 2012 and therefore, AFAIK, can only be used toward a 2012 credit. </p>
<p>Good news though - in the stupidly-named “fiscal cliff” deal, the AOC was extended for another 5 years, i.e. through the end of 2017.</p>
<p>More good news - when I cranked through your numbers last night, just for grins I figured out your qualifying payments so far for the AOC for 2013. You’re already at $3365, so including the upcoming fall semester you should have no problem getting to $4000 and qualifying for the full credit–$3218 for your D’s loans + $147 for books.</p>
<p>MomCat2, Thank you for taking the time to figure the numbers you did. I will, of course, finish up with taxes asap using my new understanding of all the things discussed and will share the results at a later date. Also, I have finally finished reading all the chapters of the P970 that are pertinent to my tax situtation. No easy task staying awake while doing that.
Also, I did find some good news. I read over all the scholarship award letters & terms and there was one scholarship that did not specify that the funds were for the 2011/2012 academic school year exclusively. It just happened to be the largest ($6,070) scholarship awarded. Maybe the good people at the Scholarship Management company were aware of the tax implications when they omitted that detail.</p>
<p>Talked to my D’s Grandfather today & he told me that he wrote the check out dated December 26, 2012 & mailed it on that day. He lives in Florida & the college is in Pennsylvania. It was later credited to my D’s college account on December 31, 2012 but the check didn’t clear until January 3rd, 2013. </p>
<p>In your opinion, does this still qualify as a payment made in December towards Spring 2013? </p>
<p>I do have a copy of the college statement showing it credited to account on December 31,2012.</p>
