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grants being taxed as unearned income

5dogs4now5dogs4now 1 replies1 threads New Member
My daughter just graduated in December, in 7 semesters. She received a significant amount of grant money each semester. I am working on taxes and realize now that the college pays its grant money for the spring semester in the spring semester. I generally paid spring tuition in December. This year, on our 1098-T, we received more grant money than paid qualified expenses. (because scholarships were for spring and fall semesters of 2019 but tuition payment only included fall 2019 since spring 2019 was paid the previous year in December). Now we have about $20,000 of unearned income and will lose the American Opportunity Tax credit. Has anyone else run into this, and is there a work around?
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Replies to: grants being taxed as unearned income

  • thumper1thumper1 77049 replies3424 threads Senior Member
    @BelknapPoint probably can answer.

    But what “work around” are you hoping for?
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  • twoinanddonetwoinanddone 24028 replies18 threads Senior Member
    How did you account for the money in the prior years? If in 2018 you had two semesters of QEE and still got the AOTC, you can't use those payments made in 2018 for 2019 taxes. You have to match them up and can only use them once.
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  • BelknapPointBelknapPoint 4837 replies19 threads Senior Member
    The purpose of the 1098-T is not to help you figure out which grants and scholarships are taxable and which are not. Look at the expenses that are qualified for tax-free scholarships and grants, and determine how each of those expenses was paid (from schoilarship or grant money, loans, out of pocket, etc.). If you have any scholarship or grant money remaining after this allocation process, the remaining scholarship or grant money is taxable income to the student in the year that it was received or directly applied to the student's account. Simply subtracting 1098-T box 1 from box 5 and coming up with a positive number does not necessarily mean that you have taxable scholarship or grant money for the tax year.
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  • 5dogs4now5dogs4now 1 replies1 threads New Member
    What I was hoping is that I could count tuition expenses for the spring semester. I need to obtain the records of when everything has been paid, as BelknapPoint suggested. Thank you very much!
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  • BelknapPointBelknapPoint 4837 replies19 threads Senior Member
    What I was hoping is that I could count tuition expenses for the spring semester. I need to obtain the records of when everything has been paid, as BelknapPoint suggested. Thank you very much!

    You may be misunderstanding what I have written. While when payments are made is one of the critical considerations in determining eligibility for an education tax credit in any particular tax year, how expenses are paid is the key thing to figure out in evaluating the tax status of grants and scholarships.
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