<p>Oh, I think I see! Yes, that makes total sense now. (Though I’m not sure I’ll be able to explain it well to dh who does the taxes, but once he understands, he’ll be very happy) Ok, this will take a little time to get the right forms, I think, but yes, we should be able to claim that credit after all.</p>
<p>Thanks bunches, CTScout and Madison.</p>
<p>Just be careful. You can make the scholarship money taxable, but you still can’t use the 529 money to qualify for AOC. Incidentally, you can take 529 money out equal to the value of the scholarship without paying the 10% penalty. You would still pay tax on the “earnings” portion of it, but it would allow you to get the money out of the 529.</p>
<p>In your situation, you would want to break things down as follows:</p>
<p>Qualified expenses:
$4000 paid with regular income
remainder paid with scholarships</p>
<p>non-qualified expenses:
(but qualified for 529)
use remainder of scholarship (this is taxable)
529 funds for anything that’s left</p>
<p>If your 529 distribution is more than the 529 qualified expenses, you have to calculate the portion of the distribution that is taxable. There is an example of this in IRS publication 970 on page 56 (2011 version) <a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a>
The 529 is what the IRS calls a QTP - Qualified Tuition Program
You should get a 1099-Q from whoever maintains your 529, showing what portion is attributed to contributions, and what is earnings. Only the earnings portion would be taxable to the extent the distribution is more than the adjusted qualified expenses.</p>
<p>For a $2,500 credit, maybe you want to pay a CPA to do your taxes this year.</p>
<p>Also read applicable portions of IRS Publication 970 so that you report the taxable scholarship income on the correct line with the right notation.</p>
<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a></p>
<p>Does it matter at which school the qualified expenses are incurred. If a student takes a couple community college courses (paid out-of-pocket), then has a full tuition scholarship plus an additional fellowship from the university where he regularly attends, can the community college tuition expenses be offset against the excess scholarship as long as it’s all in the same year? Or does the scholarship money need to be used at the institution that granted it during the period for which it is given?</p>
<p>
Yes, as long as
<p>This is my interpretation of Pub 970. Please discuss further with your tax expert.</p>
<p>Thank-you, thank-you, thank-you for all the links and advice! We will try to forge through this on our own, but are willing to look at hiring a CPA if necessary.</p>
<p>If you use a CPA, make sure they are well versed in taxes - not all are. Accounting and taxation are not the same thing. And further ask if they are well versed in taxation of educational benefits. A non-CPA tax preparer who deals with education benefits on a regular basis bay be a better choice, and less expensive. And look for someone who stands behind their work. If an error is made, will they pay any penalty and interest, or are you stuck dealing with their mistake?</p>
<p>I have 2 in college and one has received a large departmental scholarship so I am trying to decide how to file our taxes this year. </p>
<p>If we decide to make the tuition taxable will creating this type of income effect Pell eligiblity?</p>
<p>Also if he does decide to make his tuition taxable, he has always filed before using the EZ with turbo tax- can he still do it this way?</p>
<p>
No. See <a href=“http://talk.collegeconfidential.com/financial-aid-scholarships/468671-fafsa-help-putting-scholarships-grants-etc-fafsa.html[/url]”>http://talk.collegeconfidential.com/financial-aid-scholarships/468671-fafsa-help-putting-scholarships-grants-etc-fafsa.html</a></p>
<p>
Yes. See IRS Pub 970 Chapter one. [Publication</a> 970 (2011), Tax Benefits for Education](<a href=“http://www.irs.gov/publications/p970/ch01.html]Publication”>http://www.irs.gov/publications/p970/ch01.html)
</p>
<p>Question 43d on fafsa asks how much of the student’s AGI was from taxable scholarships/grants. That amount is subtracted from the student’s AGI in the fafsa formula so no affect on Pell.</p>
<p>Question 91a on fafsa asks for the amount of education credits parent’s received. According to the fafsa formula guide, that amount is subtracted from the parent’s AGI. So unless I’m missing something, it seems that would help for Pell.</p>
<p>And yes, as stated above, scholarship/grant info can be reported on 1040EZ.</p>
<p>Question:</p>
<p>We’ve talked about “double dipping” assuming that, when we put in money to the 529, we were getting a tax break somehow. But my dh tells me that what money was put into the 529 over the years was never claimed on our taxes as such; we treated it like a savings account, apparently, so we never received the tax benefit.</p>
<p>Does that change things? (And does that make sense?)</p>
<p>The tax benefit is that it grew tax free. You didn’t pay taxes on earnings.</p>
<p>
if you paying qualified educational expenses from the 529.</p>
<p>You don’t get a tax break on your federal tax return, when putting money into the 529. However, you might have been eligible for a break on your state tax returns. If you put money in recently, you might want to see if you were eligible for such breaks, and whether you can amend past state tax returns to claim them.</p>
<p>Ok, I see. We haven’t put in money for quite a while. Not sure it’s worth it to go back and amend.</p>
<p>I have confirmed exact numbers for what is to be taxed income on my son. I think I’ve done this right:</p>
<p>Fall Tuition and Fees:</p>
<p>20,885 tuition
140 fees</p>
<hr>
<p>21,025 total</p>
<p>22,221 grant; fall, 2012
3,000 outside scholarship; fall, 2012</p>
<hr>
<p>25,221 total
-21,025 minus tuition and fees</p>
<hr>
<p>$4,196 income from scholarship and grant
1,938 income from outside job</p>
<hr>
<p>$6,134
-5,950 standard deduction</p>
<hr>
<p>$ 184 untaxed income</p>
<p>$82 federal taxes paid in 2012
-18 10% tax of $184</p>
<hr>
<p>$ 64 tax refund</p>
<p>Does this look right? Or will he not be taxed at all on $184?</p>
<p>Looks good to me. He will be taxed on $184, except the tax table amount on $184 is $19.</p>
<p>sbjdorlo -
Those numbers make sense, BUT the consideration of whether you can claim the American Opportunity Credit (or any portion of it) has been dropped in the last 10-15 posts.
Let’s look at things more closely before you give up what could be a valuable tax credit:</p>
<p>I’m assuming that your son is your dependent for tax purposes (I think it’s IRS Pub. 501 that lays out the criteria for a “dependent child”)</p>
<p>I’m also assuming that he had room and board expenses.</p>
<p>Did your son receive any loans as part of his FA package? If so, the amount of loan funds (even if the loans are in his name) counts as an expense PAID BY YOU, as long as he is your dependent, and count toward the AO Credit, which would be claimed on YOUR return. (From Pub. 970: “Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you.” and “Paid with borrowed funds. You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student’s account.” [Publication</a> 970 (2011), Tax Benefits for Education](<a href=“Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service”>Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service) )
SO - if your son got the typical $5K or so of Perkins and/or Stafford loans, then there you go - you qualify for the full AOC! - (but see the question below - you will need to shift more of his scholarship/grant into the “taxable income” column for his tax return)</p>
<p>If applying loans (if any) PLUS 529 funds (I’ll deal with the 529 tax issues later)and any amount paid out of pocket toward the AOCredit doesn’t bring you up to the full $4000 amount (paid by you and/or your son toward tuition/fees/books) for the AOC, then you get as close as you can to $4000 to max out your AOC.</p>
<p>Next question:
Do any or all of your son’s scholarships or grants specify that they MUST be used for tuition and cannot be applied toward room and board or other expenses? If not, then, as mentioned in posts on the previous page, you would then CHOOSE to add more $$ ($4000, or whatever amounts you and he paid, as described above, which qualify for the AOC) to the “taxable scholarship” number that shows up on his tax return, where it will only be taxed at the 10% rate (i.e., you’re saying that “the money <em>we</em> paid went toward tuition/fees/books, and $4000 (or $3600, or however high you can get) of the <em>scholarship/grant</em> went toward room & board (and is therefore taxable)”). Even if you are in a low income bracket such that you do not owe ANY tax for the year (withheld or otherwise), you can still get the $1000 refundable portion of the credit. The worst case scenario (unlikely) is that your son would pay an extra $400 in taxes on the extra $4000, but you would save at least $1000 in taxes on your return (and up to $2500) – so you as a family end up at least $600 ahead! *<strong><em>- if he doesn’t have $4000 (or whatever amount you could get to in terms of AOC-eligible expenses) of scholarship/grant money that is not restricted as being only for tuition/fees, then you do the best you can in terms of putting whatever “flexible” scholarship money he has toward room&board. *</em></strong></p>
<p>There is also an interesting little twist (that apparently even few CPAs/tax types seem to comprehend) in the “no double dipping” thing regarding counting funds from a 529 account toward the AOC. The additional tax owed from a “double dipping” situation is usually quite small because a)the tax is only on the EARNINGS portion of the 529 withdrawal, which is usually pretty teeny-tiny unless you had the funds in the account for a long time or the investments did very well, b) the taxable earnings go on the STUDENT’S return, so are taxed at a low rate (10% in your case) if at all, c) in this situation, the additional 10% tax penalty does NOT apply.</p>
<p>See “Figuring the Taxable Portion of a Distribution” and “Coordination With American Opportunity and Lifetime Learning Credits” from this page about 529s (called QTPs or “Qualified Tuition Plans” by the IRS): [Publication</a> 970 (2011), Tax Benefits for Education](<a href=“Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service”>Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service) It lays out a detailed scenario showing how to calculate the taxable portion of a 529 distribution.</p>
<p>(Both links here are to portions of Pub. 970. Here’s a link to the whole thing: <a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf</a> This is the 2011 version, but AFIK there are no significant changes for 2012 income tax returns)</p>
<p>ACK - it’s late, and this post is not as organized as it could be (should have posed the question as to whether his schol/grant funds are restricted to tuition earlier in the post), but I hope you get the gist of it. I can help you with specifics tomorrow. Plus, I hope this post is helpful to others.</p>
<p>sbjdorlo –
before heading off to bed, I just now went back and reviewed your earlier posts in detail. It looks like you were billed $1353 for spring semester. Was the amount you paid in 2012 for the fall semester the same? That would be applicable toward the AOC. Did you pay a tuition deposit in the spring? That would also count. Did you pay a housing deposit in the summer? (A housing deposit, while not a qualifying expense for the AOC, can be paid for with 529 funds, as can other room/board charges)</p>
<p>Did he really pay nothing at all in 2012 for required books/materials/supplies? No special lab notebook, goggles, etc for a science class? No “clicker” thing used in large lectures which is used (I guess) for students to respond to questions posed by the professor? No online access fee/code required to access any textbook’s website? - typically is $30-$40 and needs to be paid even for a used textbook. No required supplies for an art class? No extra lab fees or course fees? No required software? (typical notebooks, pens, other basic supplies do not count)</p>
<p>1) You can add required textbooks to the qualified educational expenses if you haven’t already.
2) You’re not including additional taxable scholarship income in order to take the AOC, if that’s what you’d like to do. I just researched this exact same thing to make sure it was allowable. Keep in mind a couple of rules… If the scholarship/grant specified that it MUST be used for tuition/fees/books, then you must exclude that portion from income (making in tax-free, and you cannot use that portion of qualified expenses for the AOC). If it was unspecified use, or allowed to be used for room and board/transportation, etc, then you’re allowed to allocate that portion to non-qualified education expenses (making it taxable income, but potentially leaving you unreimbursed qualified educational expenses which can be used for the AOC).</p>
<p>I’m in a college taxation course, and we have access to a tax research database. I’m happy to post the information I found if anyone is interested. I found some additional explanations/examples of the tax code in the database that aren’t generally available on the web. They support what I stated above, as several people have tried to describe here.</p>
<p>As an example, let’s say for sake of argument that you have $500 in textbook expenses, $20,885 of the $22,221 grant was required to be used for tuition (it may or may not have been), and the $3000 outside scholarship didn’t specify any particular usage (again, just an example). NOTE: If you used any additional 529 money, I’m out of my league because I haven’t researched that. I do believe it can be allocated penalty/tax-free to any COA item, so depending on how much room you have in COA, it could also be allocated to non-qualified expenses, leaving some taxable qualified expenses for the AOC).</p>
<p>Fall Tuition and Fees:</p>
<p>20,885 tuition
140 fees
(ADD: $500 Textbook purchases here)</p>
<hr>
<p>21,525 total Qualified Educational Expenses</p>
<p>22,221 grant; fall, 2012
3,000 outside scholarship; fall, 2012</p>
<hr>
<p>25,221 total scholarships/grants</p>
<p>ALLOCATION EXAMPLE:</p>
<p>21,525 Qualified Expenses
(20,885) Required to be used for tuition and excluded from income</p>
<hr>
<p>630 remaining Qualified Expenses can be used for AOC (but are now taxable income)</p>
<p>25,221 Total scholarships/grants
(20,885) Excluded from income and tax-free</p>
<hr>
<p>4336 Taxable Scholarship Income (but 630 is still left for AOC)</p>
<p>$4,336 income from scholarship and grant
1,938 income from outside job</p>
<hr>
<p>$6,274
-5,950 standard deduction</p>
<hr>
<p>$ 324 taxable income</p>
<p>$82 federal taxes paid in 2012
-31 10% tax of $324 (from 2012 tables)</p>
<hr>
<p>$ 51 tax refund</p>
<p>Then, on your taxes (since you’re claiming him as a dependent), you claim the AOC and the $630 will either be used to offset your tax liability (dollar for dollar), or if you don’t “use up” the entire $630 credit to offset tax liability, you can be refunded up to 40%, or $252. If you have average income and credits, I would suspect you’d use up the entire $630 to offset your tax liability. Meaning an additional $630 in your pocket! If that $22,221 was allowed to be used for room/board, transportation, etc, you’re in an even better position to potentially claim the max AOC ($2500).</p>
<p>Obviously, this entirely depends on how the scholarships were specified to be used, the school’s COA, how much you spent on textbooks, and how much 529 money you used and how it’s allocated. If you post this information, we can probably figure it out for you! I find it fascinating!</p>
<p>For the sake of learning, I’ll post my scholarship/grant, and how I allocated that. I am an independent student for FA purposes, married filing jointly, husband works, and I also had lots of scholarship income (exceeding qualified educational expenses). Only 1 of my 10 scholarships/grants specified that the funds MUST be used for tuition only. The rest were unspecified, or allowed to be used for non-qualified expenses (room/board, transportation, personal, child care expenses, etc). I had no 529 funds in the mix.</p>
<p>7471 tuition/fees
1595 textbooks</p>
<hr>
<p>9066 qualified education expenses</p>
<p>Cost of Attendance:</p>
<p>7471 tuition/fees
1595 textbooks (I was over the college estimate, but I have receipts: Accounting books are expensive, because they update every year, so often you’re forced to buy new)
8160 room and board
1500 transportation
2100 personal expenses
1000 computer (this was a one-time add-on to COA)
1313 Dependent care (I have children, so got an add-on for daycare expenses)</p>
<hr>
<p>22,594 total cost of attendance</p>
<p>Allocation of Scholarship/Grant Funds:</p>
<p>16,338 Scholarships/Grants
(333) scholarship required to be used for tuition
(4733) Arbitrary allocation from scholarships to exclude from income (to leave $4000 in unreimbursed qualified expenses to use for the AOC)</p>
<hr>
<p>11,272 Taxable Scholarship income</p>
<p>9066 qualified expenses
(333) Scholarship required to be used for tuition
(4733) Arbitrary allocation from scholarships to exclude from income (to leave $4000 in unreimbursed qualified expenses)</p>
<hr>
<p>4000 Qualified Expenses remaining for AOC use</p>
<p>16,338 Scholarships/grants
(5066) scholarships excluded from income (4733 + 333)</p>
<hr>
<p>11,272 Taxable scholarship Income
(4000) Is allocated to unreimbursed qualified expenses for AOC</p>
<hr>
<p>7272 remaining is assigned to non-qualified expenses-room and board (this is just to check to make sure there’s room in the COA to cover this, and there is in my case)</p>
<p>Bottom Line:</p>
<p>I’ll include 11,272 in our income, and I’ll use the $4000 for AOC. </p>
<p>Normally, you would expect 16,338 in scholarships/grants, minus 9066 in qualified expenses, equals 7272 in taxable income. However, then you couldn’t take the AOC because that would be a double tax benefit. Using the allocation rules, and including an additional $4000 in income qualifies you to take the valuable AOC credit, worth $2500 in my case.</p>
<p>You just have to follow the allocation and order of the rules to make sure it’s allowed! Hence the need to know how the scholarships are required to be used, and to verify your room/board, transportation, etc allocations don’t exceed COA.</p>