From my understanding, if the scholarship does not have restrictions, you can declare it as income and take the American Opportunity Credit. For example, if you declare $1000 of scholarship money as income, you can get a tax credit of $1000 instead of a deduction for tuition. A deduction may only translate to $100-$150 of less tax if your marginal tax rate is 10-15%.
My $30,000 scholarship covered the entire cost of attendance. The maximum amount scholarships can cover is the cost of attendance. Am I still eligible to declare part of my scholarship as income to take the American Opportunity Credit? On my taxes, the taxable part of my scholarship would be higher than my school’s budget for non-tuition expenses (only non-tuition expenses are taxable). However, it is only a budget and the scholarship does not restrict where the money goes (if I paid more tuition than I owe, I would get a bigger refund check from the financial aid office after the scholarship sends the money).
Even if the scholarship does not restrict to use it on QEE, you still need to apply it on CoA. If your scholarships can cover the whole CoA, I don’t see how can you take the advantage of American Opportunity Tax Credit. Did you read the pub 970? There is really no reason to give tax credit to any students receiving full ride already.
@billcsho - You’re wrong. Did you read Publ. 970? The OP can do exactly as he’s proposing, and Publ. 970 makes this clear.
You are correct about one thing, though - there is indeed no reason to give a tax credit to a student who’s already receiving a full ride. But that’s beside the point. Clearly, that wasn’t the purpose of the AOTC, but those students who receive full ride scholarships are so few as to be statistically insignificant. They are simply unintended beneficiaries of the law . . . and there’s no reason for them not to take advantage of it!
Coordination with Pell grants and other scholarships
Scholarships and fellowship grants that the student includes in income do not reduce the student’s qualified education expenses available to figure your American opportunity credit. Thus, including enough scholarship or fellowship grant in the student’s income to report up to $4,000 in qualified education expenses for your American opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income.
See also p. 13:
Generally, any scholarship or fellowship grant is treated as tax free. However, a scholarship or fellowship grant is not treated as tax free to the extent the student includes it in gross income . . . and . . . the following is true . . . The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses.
From the Fact Sheet:
A student may allocate Pell Grant funds toward living expenses up to the amount of her
actual living expenses, which may differ from the living expenses estimated by her school in
computing her official cost of attendance under student aid rules.
Okay, but these are not Pell grant funds we’re talking about. Where does it say that the allocation of other types of scholarship funds is similarly limited?
Please also provide a link to the "Fact Sheet” you’re referencing.
@billcsho - I’m not going to wander around the IRS website looking for it. If you’re citing from a government publication, please post a link. And if you’ve found “similar text” in Publ. 970, please provide the page number.
Expenses that Do Not Qualify
Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses:
Room and board
Insurance
Medical expenses (including student health fees)
Transportation
Similar personal, living or family expenses
So my point is the student’s actual nonqualified expenses (what about a car, vacations, clothing) could certainly exceed the estimate in the COA (billcsho’s post above) leaving plenty of room to move scholarships to taxable in order to get AOTC. No where does it say the student’s actual nonqualified expenses are limited by amounts in the COA.
The other thing the OP is forgetting is that if the $30,000 covers the entire cost of attendance, the amount over qualified tuition is already taxable.
Yes, that’s the point, isn’t it? In a a family whose student receives a full ride scholarship, and also works year round (full-time summer and part-time during the school year), that student is already going to have a significant tax burden. If they can increase that burden slightly in order to claim a $2,500 credit on the parents’ return, which money can then be used to pay the student’s taxes, problem solved!
Increasing one family member’s taxes by a few hundred dollars in order to get a $2,500 credit on another family member’s return is a good strategy! Whether it works for any particular family depends on the numbers . . . and each family needs to crunch the numbers for all possible scenarios (claiming the full AOTC, claiming only a partial AOTC, or claiming no AOTC) to determine what works best for them.
In our family, a partial AOTC was the best solution . . . but it took me hours to find the “sweet spot” that yielded the maximum return (lowest tax + highest credit). Not an easy process, but definitely worth it in the end!
In fact, as noted in post #9 above, it says the opposite!
Whether paid by the student or by the parent, a student’s living expenses include all the costs listed by @Madison85 above. And you can add to that list:
Electronics (computer, cell phone, tablet)
Personal vehicle for non-commuters (for the student away at college who can’t live without a car!)
here is my situation/ question: I have $1181 in qualified expenses and got $4202 in scholarships and grants. COA is $21K. I need to know if i can apply all of the $4202 in scholarships/grants as income/ unqualified expenses (and have $0 qualified expenses) or if i should have $1181 in qualified exp and $3021 in unqualified expenses/income?
And apparently i can also put in $0 of my $4202 Scholarship/grant for unqualified expenses?
"Generally,scholarships are tax free and reduce the amount of education expenses available to claim an education credit. However, a scholarship is not treated as tax free when:
-The scholarship may be used to pay unqualified education expenses, and
-The student includes the scholarship in income (if a return is required to be filed)."
but Publication 970 states that:
“Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expenses can’t exceed the amount of the student’s actual nonqualified expenses that are paid in the tax year. This amount may differ from the student’s living expenses estimated by the student’s school in figuring the official cost of attendance under student aid rules…”
Specifically, i want to know if i can include rent, car payments, and other personal expenses when TaxActwill asks me how much of the scholarship was used for unqualified expenses? From what i understand, whatever amount of the scholarship or grant is left over after taking into account qualified expenses is (has to be) unqualified expenses (income).
so the categories for Scholarship/grants according to TaxAct program are:
Sorry, but that makes no sense. If your COA is $21k, tuition & fees must be more than $1181. Did you receive a 1098T? What did it say?
Keep in mind that your qualified expenses include tuition, fees, textbooks, and any other supplies that are required for a particular course. (It may also include your personal computer - I’m not sure.)
What about tuition? I think you have more than $1181 in QEE, unless you go to a school that charges $1000 in tuition and $20k in room and board.
If you have $10k in tuition, and $1181 in other expenses like fees and books, you have $11181 in QEE. Subtract your $4202 in scholarships, and you still have almost $6k in QEE so your parents can take the full AOTC.
Like @dodgersmom it took me awhile to find the sweet spot. Literally had my return open in one browser and D’s in another, moving $500 from one to the other, to find the optimal amount. I found it, and am paying her taxes out of the AOTC and still coming out ahead.