Scholarship as income to take AOC - not passing the sniff test

[jasdlm]

Client's freshman student received scholarships of $6,000 and tuition was $4,000.  Client paid another $5,200 for fees, housing, etc.  The scholarships were not restricted to qualified expenses.

I think I can put the $6,000 on the student's return (student has $4,000 of SE babysitting income) and then claim the full AOC on the parents' return.  Student owes only self employment tax because total income is under $12,000.

I've done some research/reading, and I think this is accurate, but it's not passing the sniff test.

I've added back 529 distributions to take AOC before, but this is the first I've had where scholarships exceed qualified expenses.

Anyone have experience?

Thanks much!

[Sara EA]

How do you know the scholarships were not restricted?  I have never been able to find enough info on any particular scholarship to determine if it was restricted or not.  Usually grants are the ones that are not restricted.  I would have loved to do what you are proposing but could never find info on the particular award to be sure ("presidential scholarship," anyone?).

[jasdlm]

I had my clients reach out to the financial aid office at the school.  I got the language of the scholarships.

[Randall]

7 hours ago, Sara EA said:

How do you know the scholarships were not restricted?  I have never been able to find enough info on any particular scholarship to determine if it was restricted or not.  Usually grants are the ones that are not restricted.  I would have loved to do what you are proposing but could never find info on the particular award to be sure ("presidential scholarship," anyone?).

I tend to agree with Sara.  I assume if the 1098T shows tuition paid and scholarships, the scholarships are used for the tuition.  I'm not going around the world to work this maneuver.

[Pacun]

This is what I did with my daughter's 1098-T. My daughter lives with her mom only attends school because they live 4 blocks from campus and yet 1098-T reads that her scholarships were 30K and tuition only 24K. I asked her to give me her whole account report and at the end of 2019 the balance was 0. In 2020, my daughter got scholarships from private donners $1,000, state scholarship $2,500, university scholarship $7K, federal grants another $5K and other scholarship for another $1,500 (not accurate numbers but very similar) Then I got US gov-backed loans for $2K, another personal loan for $4K. Another loan for about $1K, refunds were listed too and they totaled about $2K. 

Story over, now my points. If I were to read the scholarships rules, I will have to read a lot because my daughter got at least 5 different scholarships and each with its own rules.  The 1098-T is wrong and it might list loans as scholarships or they are listing less tuition charged.  What I did, I got the loans, added them up and substract the refunds and use that amount to get AOC.  On ATX I entered the 1098-T as sent and below there is a line to enter the correct amount of payments. I have highlighted the loans amounts and refunds for 2020 and I have saved those records with their taxes. I didn't match the amounts but I noticed that there is no money left. 

How could scholarships be bigger than tuition and by a lot if she doesn't have room and board expenses. I guess students can get more if they apply and are good students.

Also, ATX told me that I have claimed 4 years already but it reads 3 on "how many years have you claimed before".  I had to check 2016 to sure.  My daughter finished her bachelors in 3.5 years and there is no way for me to claim the AOC for 5 years.

[Lion EA]

Always get the bursar's statement. Forms 1098-T are notoriously inaccurate. (I don't know what that says about the colleges teaching our next generation.)

[jasdlm]

7 hours ago, Randall said:

I tend to agree with Sara.  I assume if the 1098T shows tuition paid and scholarships, the scholarships are used for the tuition.  I'm not going around the world to work this maneuver.

My understanding is that even if the scholarship is used for tuition, if it's not REQUIRED to be used for tuition, you can essentially 'assign' it to other nonqualified expenses (room and board, etc.) and use the amounts paid by the taxpayer as the payment for qualified expenses.  I have the bursar's statement, but I also needed the scholarship lingo to make certain they weren't 'tuition only' scholarships.  I know it's a lot of work, but in this case, it's worth $2,500 to the taxpayer. (If my understanding is correct, that is.  If not, I'm wasting my time and yours, and for that, I apologize.)

I'm leaning toward filing this way; It just seems to good to be true, so I wanted to see what others thought.

I appreciate all of your input!

[TexTaxToo]

Treasury has long advocated this technique:

https://www.treasury.gov/connect/blog/Pages/Helping-students-and-families-access-college-tax-benefits.aspx

I use it all the time.  You do have to insure the scholarship is unrestricted (Pell grants are always unrestricted).

And if the amount of the scholarship is more than the qualified expenses, it almost has to be unrestricted, doesn't it?

 

[Catherine]

9 hours ago, Lion EA said:

I don't know what that says about the colleges teaching our next generation.

I've seen plenty of Bursar's Offices do things that, if done by a for-profit business, would be malfeasance at least and fraud very likely.  Don't trust any of 'em as far as I can spit.

[Randall]

I thought the 1098Ts were changed a few years ago and much more accurate than in the past.

 

[Lion EA]

You would think. They're supposed to report what was paid now. Not what was billed, which didn't help us at all. But PAID seems to have different definitions to different colleges. Some report net pay after loans and scholarships, some subtract some things but not others, some cross year-end to report the semester/school year it applies to and not the calendar/tax year. You need the bursar's statement with dates and amounts and sources and often the parents/students adding up what they paid via check/etc. I expected better from institutions of higher learning.

[TexTaxToo]

College business associations have been vocal in protesting the 1098-T rules.  Not sure of the current status, but the IRS delayed enforcing them for a long time.

There is even an exception that the 1098-T does not need to be issued if the scholarships/grants pay the entire tuition.

And good luck trying to match up the 1098-T with the college financial statements - very frustrating.

 

[Lion EA]

Don't try to match up the 1098-T with anything, because they are often wrong. Use the bursar's statement for amounts. You need the 1098-T to document college enrollment and Box 8 "At least half-time student (if checked)."

[Possi]

To carry on this conversation, my client received scholarships exceeding tuition paid by about $4000. HOWEVER, most of that was for a class abroad. I have the bursar report clearly showing her own money paying for tuition and fees exceeding $4000.

This is her 4th year of AOC. 

As long as I have documentation, I can still take the full AOC, correct?

 

[Catherine]

As long as she paid a school in the USA, yes.  If she paid a foreign school, then it depends on whether or not they're - I forget the term, registered, qualified, something - with the US Dept of Ed.

[Gail in Virginia]

4 minutes ago, Catherine said:

As long as she paid a school in the USA, yes.  If she paid a foreign school, then it depends on whether or not they're - I forget the term, registered, qualified, something - with the US Dept of Ed.

Is it accredited?

[Hahn1040]

Having a FAFSA number is the key.

Though, sounds in this case that it was reported on the 1098T.  Often you pay your own school for the study abroad semester.

[Catherine]

23 minutes ago, Gail in Virginia said:

Is it accredited?

Not quite. Had a client who took a course in eastern Europe.   Accredited college, but not on the US list, so we couldn't even take lifetime learning credit.

[Possi]

Her college tuition is from an accredited school here in the US.