American Opportunity Credit

[Christian]

Aftermuch head scratching. The client had $5,950 in qualifying education expense in 2019. He received $2,223 in scholarships which were unrestricted meaning they could be used for any of his daughter's expenses. The amount I can prove he paid would be $1,685 in mandatory fees (he paid for books but can't segregate the checks). My problem now is the ATX program shows all expenses covered by the scholarships and is tax free income and I can't transfer the $1,685 to the education credit federal form.

[Terry D EA]

Sorry but I can't help you with ATX. However, in Drake, you enter the total qualified expenses, then enter the scholarship (drake is education assistance), then the balance would go to the credit. With the AOTC, you can only claim up to $2500.00. So in your case, 5950.00- 2223.00 = 3727.00. The AOTC should be 2500.00, part credit to reduce taxes and part refundable. 40% refundable up to 1000.00. The remaining 60% is to reduce tax liability to zero. A lot of times the client spends significantly more than what can be recouped from the credit.  As in the past, I believe you can only take one of the credits. Either AOTC, LLLC, or tuition and fees but not two at the same time. If your client qualifies for the AOTC, then that will always return the best result. 

[Lion EA]

If you have a state tax return, especially one that starts with federal AGI, then do check the T&F which lowers AGI to see if it gives a better result for your client than AOTC which lowers federal tax only and not state tax.

[EricF]

19 hours ago, Christian said:

Aftermuch head scratching. The client had $5,950 in qualifying education expense in 2019. He received $2,223 in scholarships which were unrestricted meaning they could be used for any of his daughter's expenses. The amount I can prove he paid would be $1,685 in mandatory fees (he paid for books but can't segregate the checks). My problem now is the ATX program shows all expenses covered by the scholarships and is tax free income and I can't transfer the $1,685 to the education credit federal form.

Christian,

In ATX, go to the 1040 ExExp worksheet, Scholarship Worksheet tab.  The default is to show the scholarship as nontaxable on Line 7a.  You can enter a different number you want to be tax-free on that line, and it will show the balance as taxable.

[Christian]

Thanks to all for your input. It looks like I will be able to get the client an AOC credit. Two of his scholarships are unrestricted meaning they MAY be used for meals, room & board non-tuition expenses. They do not HAVE to used for these expenses. To my mind these amounts may be credited to his daughter which will produce no taxable income to her and $1685 of fee income dad covered becomes eligle for the credit. The federal instructions are typically difficult to understand. My last qualm is if these scolarships HAVE (are required) to pay for these non-tuition expenses as opposed to MAY to qualify as taxable income. The Pell Grant is open ended and does not REQUIRE that it be used for non-tuition costs as is the other scholarship. Any clarification on this final point is appreciated. 

[EricF]

I think Publication 970 is clear.  Both pages 15 and 16 have the same language: "the scholarship or fellowship grant must be one that may (by its terms) be used for nonqualified expenses." (Emphasis supplied by me.)

[Christian]

I agree Eric and that is what I will use. The Pell Grant fills that bill leaving some $705 of uncovered qualified expense which the dad covered by payments and loans. Thanks to all for all assistance. Having yall's assistance to clarify this was much appreciated.

[Matthew in the PNW]

 The general chat on here seems to align with what I was thinking.

On 2/3/2020 at 6:45 PM, Terry D said:

Sorry but I can't help you with ATX. However, in Drake, you enter the total qualified expenses, then enter the scholarship (drake is education assistance), then the balance would go to the credit. With the AOTC, you can only claim up to $2500.00. So in your case, 5950.00- 2223.00 = 3727.00. The AOTC should be 2500.00, part credit to reduce taxes and part refundable. 40% refundable up to 1000.00. The remaining 60% is to reduce tax liability to zero. A lot of times the client spends significantly more than what can be recouped from the credit.  As in the past, I believe you can only take one of the credits. Either AOTC, LLLC, or tuition and fees but not two at the same time. If your client qualifies for the AOTC, then that will always return the best result. 

I'm not sure how you go to that credit. 3,727 in edu expenses... (2000*100%) + (1727*25%) = 2,432

On 1/29/2020 at 2:36 PM, EricF said:

You can choose to make some or all of the scholarship taxable to the student.  This would leave the tuition available for the parents to take the full AOTC.  The scholarship income is considered earned income that can increase her standard deduction and result in zero taxable income.

Isn't it treated as earned income for purposes of determining the standard deduction but unearned income with respect to caluclating the tax. Do the trust tax rates come into play? 

https://www.thetaxadviser.com/issues/2018/may/counterintuitive-tax-planning-increasing-taxable-scholarship-income-reduce-taxes.html

One problem is the article references §1.117-6(h) which I couldn’t find (it goes from 1.117-5 to 1.118-1).

Another is it say the standard deduction (relief?) applies to 2018 and I’m doing 2019 I assume the PUB clears this part up though?

On 2/4/2020 at 7:19 AM, EricF said:

Christian,

In ATX, go to the 1040 ExExp worksheet, Scholarship Worksheet tab.  The default is to show the scholarship as nontaxable on Line 7a.  You can enter a different number you want to be tax-free on that line, and it will show the balance as taxable.

Thanks Christian!

 

If you can apply the scholarship to room and board as taxable income, couldn't you manage to find enough qualified expenses for the full $2,500?

400*12=4,800 

6,400-4,800 = 1,600

1,600 /3 = 533 in books and supplies

That leaves over $4,00 in tuition if the books cost that much