Form 8863 Fraud or Not Fraud

[Terry D EA]

I read from another discussion board which will remain nameless, a method they called "Advanced Education Credit Strategies". This involves making a portion of the scholarships taxable income, when scholarship amounts exceed the expenses to make the client qualify for the AOC. Personally, I think it is fraudulent reporting and unethical and won't do it. Has anyone ever done this? All the training, CEU studies and other things I have done on education credits have never mentioned anything like this. Three or our people on the other board chimed in that they do it all the time. 

[Lion EA]

The IRS suggests this method. Read the sections on "Coordination." https://www.irs.gov/pub/irs-pdf/p970.pdf

[Terry D EA]

Ok, so I stand totally corrected and learned something. Thank you for straightening me out. The whole process just didn’t sound legit.

[Lion EA]

You have to read the terms of each scholarship. Some are restricted to tuition only. 

Let's say your daughter has $10,000 in tuition and $10,000 in scholarships. That's not bad; a free education. But what if not all her scholarship(s) are restricted to only tuition; maybe $4,000 may be used for other expenses, such as room and board. Now she has $6,000 tax-free scholarships applied to tuition and $4,000 taxable scholarships at her tax rate of 0%-10% (does Kiddie Tax kick in over $2,200?). But you now have $4,000 paid toward her tuition for a full AOC of $2,500; a credit that's valuable at your typical marginal rate of 22% or 24%. You have to run the numbers to get the best outcome for the whole family, but there are possibilities to be a real hero to your clients.

[Terry D EA]

I get it. In your example the 4000.00 if used on non-qualified expenses, is taxable income is legitimate because you used the bursar’s statement. My take on the other conversation was folks  were randomly making part of the scholarships taxable income to get the credit without using actual expenses. I always ask for the bursar’s statement and have always done the 8863 this way and have obtained the AOC many times. However without the bursar’s statement, and only 1098-T in hand, I still find it strange to make a portion taxable income to obtain the credit. I read the pub on the coordination and it does suggest making some of the scholarships taxable income. I just thought it strange to do this without substantiation. Another question is, is the pub the authority in an audit? A few years back, A couple of my clients received letters from the IRS asking for proof of the college expenses beyond the 1098-T. 

 

[Sara EA]

Good luck finding out if a scholarship can be used for tuition or other expenses.  I assume most are only for tuition, with the exception of some athletic scholarships.

[Lee B]

Also full ride scholarships for very talented high achievers

[Lion EA]

And, Pell Grants can be used for practically anything college related, such as room & board.

Yes, you need the bursar's statement to see what those other expenses are, as well as receipts from student/parent re books, computer, and things. And, the timing of payments, expenses, scholarships, etc.

Drill down to the code.