<p>I just received a tax audit for my 2012 taxes and taking the education credits for two kids. They want documentation for my claim. I understand that. Here is my question. If the 1098 says they have $10,000 in grants and $10,000 in expenses, the logically you can't take the credit. But what if they used the grants that didn't have stipulations on their room and board? And used loans on their qualifying expenses. How do you show that to the IRS other than having it taxed on their returns?</p>
<p>You should be able to document what your expenses were and how you covered those expenses (grants + loans + any other sources). Then divide the payments up, indicating what source they came from and what they were used to pay for, such that you have enough in non-tax advantaged payments to cover the education credits that you claimed. Just make sure that if you covered any non-QEE stuff with scholarship/grant money that you reported that as taxable income on your return.</p>
<p>If they used the grants/scholarships on R&B, and you paid the QEE with cash (not 529 or other benefited money), the amount used for R&B should have been reported on their tax returns. You can show that by submitting a copy of their tax returns showing the scholarship overage with your audit response. If they didn’t claim the overage (because they didn’t owe any tax), you can try to show an accounting, but the IRS may not accept it. It may be necessary for them to go back and file a 2012 return, even if no tax is owed.</p>
<p>Using loans for QEE is just like using cash.</p>
<p>I just sat in a presentation by a gentleman from the IRS last week during the Federal Student Aid Training Conference. He stated that the 1098-T is an informational document. When you paid, how you allocated the grants, etc does not have to match the 1098-T info. You just have to be able to provide documentation to support what you did. Whatever logic you used when doing your taxes, relay that to the IRS. </p>
I just received a reply from the IRS after I gave them my calculations on how I used the grants and the 1040s for the boys showing I paid taxes on the grant money that we used for room and board. Here is their reply: “In your calculation you have not reduced the total expenses by the full amount that the student received in tax free assistance. Any amount the students receive are tax free to the extent that 1) they are not designated for purposes other than qualifying expenses 2) they do not exceed qualifying expenses 3) they are not for services performed by the student. Unless the scholarships or grants that the student received were specifically designated for expenses other than qualifying expenses (such as room and board) the amounts are tax free. If any amount is taxable, it is only the excess after qualifying expenses. The treatment of these awards is determined by their terms, not by an election to treat them taxable. Please provide documentation for these grants saying they can not be used for qualifying expenses.” This contradicts everything I could find in my research saying if there were no stipulations on how you used the money, then you could pay tax and use it any way you want. I also called a tax firm and he told me it has to be used to qualifying expenses first and I was shit out of luck.
That’s flat out wrong. See IRS Publ. 970, p. 14: Example 2 and Coordination with Pell grants and other scholarships. Both state clearly that one may elect to report all or part of an undesignated scholarship as taxable income - which is exactly what you did.
Whoever is telling you something different either doesn’t know what they’re talking about or is just trying to intimidate you (or both). They’re wrong; you’re right. And their own documentation (Publ. 970) supports your claim. Go over that person’s head.
^ That is what I originally thought until I read someone said here otherwise. I went back to my tax software and adjust all the amounts in order to claim the tax credit. Now you get me worry. Before I revise the tax return, I have contacted the Financial Aid Office and they refuse to give any tax advise. They just said all scholarships will be applied to tuition and fees first but they do not mention anything about the grant. So I just treat the grant as taxable income on my D’s return.
Financial aid offices are not tax experts, so they cannot give tax advice. In fact, the aid office does not prepare or issue the 1098-T. The IRS encourages colleges to communicate the tax credits, but schools simply are not in a position to give advice. Here i a link to an IRS page that has lots of good links regarding tax credits: http://www.eitc.irs.gov/Other-Refundable-Credits/aotcllc.
@dodgersmom What do you think about the worksheet on pub 970?
I don’t know, @billcsho. I haven’t used the worksheet - I just read the instructions.
The worksheet on the pub said you need to offset QEE first.
What worksheet? The only worksheet in chapter 2 is for calculating MAGI for eligibility.
This is scary! It sounds like the IRS has “reinterpreted” how they want to treat this issue and we are all helpless. No matter if we are right, we lose anyway.
Or one IRS employee doesn’t understand how it works.
According to Pub 970 the OP should only have to show that the terms of the grants don’t prohibit them from being used for non-QEE.
This sentence is part of the coordination with grants and scholarships language on pg. 14 of pub. 970:
Also, the scholarship or fellowship grant must be one that may (by its terms) be used for nonqualified expenses.
Perhaps in sherri0629’s case it is being interpreted to mean that there must be specific wording in the scholarship terms that allows the scholarship to be used for non-QEE, as opposed to a less stringent requirement that the scholarship terms simply make no mention of what the money may or must be used for.
Examples:
- "This scholarship may only be used for tuition." MOST RESTRICTIVE, CAN NOT BE MOVED TO TAXABLE INCOME
- No written guidance on what the money can, should or must be used for. OPEN TO INTERPRETATION
- "This scholarship may be used for any higher education related expense, including room and board." LEAST RESTRICTIVE, DEFINITELY SATISFIES THE IRS CONDITION NOTED ABOVE
I have another tax firm digging through everything now. I will let everyone know what he says. BTW, it was Pell grants that we counted as taxable income used for room and board. The IRS is saying unless the Pell says it CAN NOT be used for qualifying then I have to use it for qualifying expenses. I know you can use Pells for room and board, so I am anxious to see what the tax firm says.
If you haven’t seen this link before, it’s from the IRS website. It talks specifically about Pell Grants(while saying other scholarships/grants can be used this way too if there aren’t restrictions) being used for living expenses so the parents can take the AOTC. It doesn’t have a date but you may want to show it to the tax firm if they aren’t aware of it.
And even the “What’s New” section of the 2014 form 8863 includes new text about this.
That’s just nuts, and is directly contradicted by the IRS’s own document that annoyingdad linked to above in post # 16. Please let us know how this turns out with the IRS.
Yes, keep us posted. I am on the same boat. These 2 documents annoyingdad are very important argument in this case.