<p>This is a good problem but unexpected: My DS has merit scholarships and also state educational funds which will cover nearly all of his tuition. He does have $800 in "required fees" and also $135 per semester fee for music lessons. We have 529 funds to cover room and board, as well as books although we should be hearing any day about a book scholarship. </p>
<p>I've been promoting the AOTC tax credit on another thread, but I'm not sure how we're going to use it this year. Does it make more sense to pay $1000 out of pocket for this semester for tuition/fees and another $1000 before the end of the year for next semester, and claim $2000 credit, or apply an additional $2000 from the scholarships to room and board so we can claim additional $500. But then that makes the scholarship money taxable and I'm not sure what that means. I hate doing taxes and it feels to me that the additional $500 credit is not worth the bookkeeping. Is it?</p>
<p>The additional money over tuition and fees and books (qualified educational expenses) are taxable income for your son. He would fill out a 1040-EZ as someone who is claimed on someone else’s taxes. It is a very easy form to fill out. If it’s only a matter of $2000 he won’t owe taxes because it is below the exemption. If he has income from a summer job or investments in his name, that could increase his income to a level where he would owe.</p>
<p>Some states may charge income taxes on surplus scholarships, so check that as well.</p>
<p>As your dependent you get his exemption but he still gets his standard deduction of $6200 for 2014. If his total income is under that he wouldn’t have to file. If it’s over that, you may need to file form 8615 for the kiddie tax. Starting with 2013, taxable scholarships/grants are considered unearned income for the purpose of the kiddie tax. So part of his income may be taxed at your rate rather than his depending on the actual numbers involved.</p>
<p>You can read about that starting with post #27 in this thread:</p>
<p>And yes, you would need to do the bookkeeping to keep records of QEE actually paid and scholarships/grants awarded. The school may give you a form 1098-T containing this information but you should verify the accuracy based on bills and records of payments. That’s especially true if the school bills and/or credits the scholarships/grants in December but you pay in January for 2nd semester. When you pay is what matters for the AOTC.</p>
<p>If this will be your son’s first semester in college, you may only have one semesters worth of qualified expenses and scholarships/grants to include on 2014 taxes if everything is billed/paid in January for 2nd semester.</p>
<p>Also, you have to coordinate any tax-free 529 distributions with the AOTC and tax-free scholarships/grants. You can’t get more than one tax benefit for the same expenses.</p>
<p>Do you have a reference to where it says that scholarships used for room and board become taxable?</p>
<p>Also, if that is the case, I think it would matter if on-campus housing and a meal plan is mandatory at the particular college. If a freshman <em>must</em> pay for room and board of some sort, I don’t think it is considered the same as “optional” room and board. (that is, if you live in NYC and your son is going to college in NYCC, they wouldn’t let him live at home even if he could, if freshman staying on campus and having the meal plan is mandatory)</p>
<p>I’m also wondering - why would you use 529 money for anything, if your son has enough scholarship money to pay for everything? It can be used for another child or for your grandchildren, at the very least if your son can’t use it.</p>
<p>It does not matter whether or not the student is required to live on campus freshman year. The student would have housing and food expenses wherever he or she lived, so the IRS charges tax on scholarship money that is used for room and board.</p>
<p>Using 529 money to pay for room and board is fine and doesn’t make it taxable. However, you can’t use any 529 money, even if it pays for books and tuition, as a qualified educational expense to get the AOTC. One tax benefit for each dollar.</p>
<p>You need to run the numbers to see how you make out the best. If graduate school, professional school, other kids, family members that can better use the 520 money are some possibilities. You can only get the AOTC for undergrad costs, not grad, for instance, and grants are often hard to come by for grad school with loans often being an essential part of making those costs.</p>