Election to pay tax on Scholarships

[cpabsd]

I have a dependent that it is beneficial for the scholarships to be treated as taxable to free up the ability to use QEE for the American opportunity credit.  I know the taxable portion is reported on Line 1.  Would the taxable scholarship get reported on child's 1040 ( it was received by child) and parents claim the Educational credit?  It seems to be the way it would be but how can that be tracked?  Maybe my tired brain is overthinking it but any guidance or confirmation is appreciated.  

Thanks!!

Bonnie

 

[Randall]

I've heard of this strategy but it sounds bogus to me.  It seems the scholarships pay the education costs and reduce qualified education costs eligible for the credit.

 

[Lion EA]

It's a great planning technique. It does require that the scholarship can be used for non-tuition items, such as room & board, in an amount ($4,000, for example) that gives the parents the AOC. The child at his lower tax rate pays tax on some scholarship monies, and the parents gain an education benefit at their higher tax rate.

[Randall]

Yes, I've heard of this.  But this still sounds like the traditional way of scholarships, that is, if the scholarship exceeds costs of tuition, a way to get around the child paying tax on the excess as income.  I think the scholarship would have to be very specific in wording to NOT apply to tuition to get around everything so the parents can claim AOC.

[Lion EA]

1 hour ago, Randall said:

 if the scholarship exceeds costs of tuition, a way to get around the child paying tax on the excess as income. 

Don't try to get around the child paying tax on the excess as income. (Unless the parents are in a lower tax bracket than the child.) It's usually more beneficial to pay at the child's tax rate if there is excess. And, if you can create excess to give the parents the AOC if they qualify, that's going to be beneficial for the child to pay tax at his rate to save the parents via the AOC at their tax rate. You'll find examples and guidance in the IRS Pub about coordinating education benefits.

[Abby Normal]

With the new higher standard deduction, this is becoming more routine for us.

[Randall]

I'll have to check out those examples in the IRS Pub.  But I don't see how you can create your own excess.  If the scholarship is for the tuition, I think the tuition is gone for AOC.

 

[Lion EA]

Not all scholarships are limited to tuition. Some can be used for books or room & board or... Ask your clients questions. Do the best for the whole family.

[GraceNY]

What about the "kiddie tax?"  Aren't taxable scholarships taken into consideration?

[NECPA in NEBRASKA]

Yes, I just went through that with one. I had her pay tax on her 1099Q so that she stayed under the kiddie tax.