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Taxable scholarships and AOTC

laraleilaralei 765 replies59 threads Member
I know there have been a few threads on this. I used scholarship money for my kids as taxable income on their taxes and claimed the AOTC on my tax return.

I was audited by the IRS regarding the AOTC. They required supporting documents and I sent in the usual, 1098-T, my worksheets from the tax program, receipts, copies of their tax returns where the scholarship income is listed.

I was sent a bill as they removed the AOTC from my taxes stating I did not prove payment of college expenses allowing for the credit. I need to send in paperwork showing the actual payments made to the school in order to claim the AOTC.

I've looked back at some threads and it seems to me that the IRS is wrong, or did I misunderstand?

edited December 2019
6 replies
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Replies to: Taxable scholarships and AOTC

  • mommdcmommdc 11654 replies31 threads Senior Member
    @laralei sorry about the audit.

    Since the 1098T now is supposed to list what qualified tuition and fees was paid during the year, not what was billed like in the past, I would think an audit would be less likely.

    Maybe in the case of QEE listed on the 1098T is smaller than grants and scholarships received, this might be more likely?

    My D had a tuition scholarship, it was specifically for tuition, so I only claimed qualified fees and book expenses for the AOTC.

    She in turn reported outside scholarships and state grant on her tax return as taxable income.

    In your case, did you have QEE in the amount of the expenses you claimed for AOTC, that was paid by you or paid by loan funds by your D?

    If your D took out a student loan, that should be reflected on her tuition statement, and that should prove "payment".

    If you want to pm me, maybe I can take a look at your numbers.
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  • laraleilaralei 765 replies59 threads Member
    Thanks for the response. I couldn't get online w/ the recent changes.

    I will PM you.
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  • twoinanddonetwoinanddone 23661 replies17 threads Senior Member
    If your D took out a student loan, that should be reflected on her tuition statement, and that should prove "payment".

    No, it doesn't prove QEE. My daughter had her loan funds given to her and used them for rent payments and other incidentals, which aren't QEE. Her QEE was entirely covered by scholarships and grants, so I had to 'shift' some of those funds to taxable income to her so I could take the AOTC.

    I am so thankful I wasn't audited! I kept all my notes. Her 1098T were never correct as I, from the beginning, kept all the charges in the tax year and not in the billing year (her school posted the charges in Dec but didn't post the corresponding grants until Jan).

    @laralei I think you are correct and the IRS is (gasp!) wrong.
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  • mommdcmommdc 11654 replies31 threads Senior Member
    @laralei, I sent you a PM, I had trouble signing in.

    @twoinanddone, what I meant was, if the student has all billable charges paid with Pell Grant, state grant, scholarships, and student loan, then that student loan payment is a form of out of pocket payment to the school.

    Not all students get all of their loan funds refunded. The IRS was looking for payment to the school. If loan funds are used for QEE, then why doesn't that prove payment?

    For example, my D had tuition covered by a scholarship, and the state grant refunded for housing, but part of her student loan paid for the fees, and we can claim that part towards an education credit, as long as she is our dependent, even though we didn't send any money to the school.
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  • laraleilaralei 765 replies59 threads Member
    @twoinanddone That is what I had to do with DS as well.

    I know many here did the same thing. I sent in supporting documents for 2 students with notes explaining how I was able to do this. It was over 1/4 inch thick.

    I will post again when I actually get this resolved.

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  • mamag2855mamag2855 809 replies2 threads Member
    This has been posted on older threads concerning scholarships and the AOTC. It is on the treasury dept website and shows examples for claiming the AOTC, when pell and other grants/scholarships exceed QEE.

    https://www.treasury.gov/connect/blog/Documents/Pell AOTC 4 pager.pdf

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