Maximizing American Opportunity Tax Credit

[Pegasus]

I wanted to share a few things that I've recently learned about the AOTC:

 

1. You CAN include eligible expenses from dual enrollment if they were incurred the same year that the student attended at least one term at least half-time at an eligible college and pursuing a degree. In other words, the senior high school spring term dual enrollment expenses can be included in your AOTC calculation if they start attending freshman college courses at least half-time in the fall of the same calendar year.  The IRS website is suprisingly easy to read and very clear about this point.

 

2. The AOTC currently only extends through 2017.  Congress may or may not extend it again beyond that. So, while I can't quite max it out ($4000 expenses for 2015 for a credit of $2500), I'll probably go ahead and claim it rather than saving the credit for the first full calendar year of college expenses, which would be 2016 for DD.   You can only claim AOTC for a student 4 times so it is sometimes better to not claim it for the calendar year in which they just start college (since it only includes 1 semester). If Congress extends the credit, I'll be a few hundred dollars behind but if they don't extend it, I may be ahead by a lot more than that.

 

3. Unless a scholarship specifically states that it must be used for tuition, you can chose to apply it to non-eligible expenses and thus claim more tuition costs for the AOTC.  This is true even if the school automatically applied the scholarship funds to tuition. The amount that you chose to count towards non-eligible expenses must then be claimed as income by the student. There's a great publication put out to explain how this works with the Pell Grant as well as scholarships. I'll try to add the link here after I post:   http://www.irs.gov/pub/irs-utl/Pell%20AOTC%204%20pager.pdf

 

 

[G5052]

The other tip I recently got is that the $ you pay counts for the calendar year you paid it.

 

So if you pay their tuition for January in December, it counts for the year you paid it. As long as what you paid in December goes for expenses in the next three months of the following year, you're fine.

 

So assuming the credit is extended, no problem using it for four academic years starting with their first fall semester as long as you pay their January tuition in December for each year.

 

From this link: http://www.irs.gov/publications/p970/ch02.html

 

Glenda enrolls on a full-time basis in a degree program for the 2015 Spring semester, which begins in January 2015. Glenda pays her tuition for the 2015 Spring semester in December 2014. Because the tuition Glenda paid in 2014 relates to an academic period that begins in the first 3 months of 2015, her eligibility to claim an American opportunity credit in 2014 is determined as if the 2015 Spring semester began in 2014. Therefore, Glenda satisfies this third requirement.

 

 

 

[G5052]

For some reason, I can't edit my post now....

 

I meant to add that you can also include books in the total if you're not quite up to $4,000, even if they weren't bought from the college.  

 

 

[Pegasus]

Great additional info!  It is very important to keep up with all those book receipts when purchased at different places.  I need to go back and make sure I have all of them.

[G5052]

Great additional info!  It is very important to keep up with all those book receipts when purchased at different places.  I need to go back and make sure I have all of them.

 

Yes, with scholarships, we're going to need the book receipts for sure. 

[klmama]

This is timely. Dh wanted to transfer the tuition money to dc's account and then have dc write a personal check to the college, with the goal of getting dc into the bill-paying habit.  Would that nullify our claim for the AOTC, since dc would be the person on record as paying, not one of us?

 

 

 

 

[G5052]

This is timely. Dh wanted to transfer the tuition money to dc's account and then have dc write a personal check to the college, with the goal of getting dc into the bill-paying habit.  Would that nullify our claim for the AOTC, since dc would be the person on record as paying, not one of us?

 

From my understanding, as long as the DC is a dependent, it shouldn't matter who pays for what.

 

When it comes to tax time, you'll get a 1098-T from the college for what you paid in tuition and fees.

 

I know that in Turbo Tax they ask for both the amount from the 1098-T and then book expenses. No questions about who paid.

 

FWIW -- I wouldn't transfer tuition to a kid's account, but that's a personal preference. I transferred money for books and expenses, but tuition is a bill that I pay. Not making any assumptions, but I've heard some stories about folks that have done that with some problems.

[Teachin'Mine]

I had posted this in another thread, and thought it would be helpful here.  Truth be told I'm hoping that having it all in one thread I'll be able to find this info when it comes to tax time.  Pegasus, good info about the spring semester of dual enrollment expenses!  

 

This link is about how to apply grants and scholarships regarding tuition and fees vs living expenses, including room and board.   http://www.irs.gov/p...TC 4 pager.pdf�   We are permitted to count actual living expenses, not just the room and board charge.

 

Edit:  The link isn't working.  I found this but it's not what I originally had.  This explains that a Pell Grant can be applied to living expenses instead of tuition.  http://www.irs.gov/pub/irs-utl/Pell%20AOTC%204%20pager.pdf

 

I think that what I originally linked was the info contained in the IRS info on the AOTC under the heading Coordination with Pell Grants and other scholarships.

 

2nd edit::  Pegasus already covered this issue in point number 3 in her original post and even has a working link.  I really should have coffee before posting!

 

[8filltheheart]

To add clarity, any scholarship $$ in excess of tuition and fees that exceeds their personal deduction is considered unearned income and taxed at the parental unearned income rate, not the student's earned income rate.

[Pegasus]

From my understanding, as long as the DC is a dependent, it shouldn't matter who pays for what.

 

 

 This is my understanding as well.  The AOTC is claimed on the tax return of the person who claims the student as a dependent.  It doesn't matter who pays the costs. There are some examples on the IRS website with divorced parents, even if one pays the college costs, the other parent gets the AOTC if they are the one who claims the student as a dependent.

[Pegasus]

To add clarity, any scholarship $$ in excess of tuition and fees that exceeds their personal deduction is considered unearned income and taxed at the parental unearned income rate, not the student's earned income rate.

 

I admit to finding this a bit confusing. Can you please explain a little more or link a reference where I can read up on this?  My understanding is that any scholarship $$ in excess of tuition and fees needs to be claimed on the student's tax return as income. . .am I correct so far?  So, would a program like Turbo Tax automatically calculate any tax based on the parental unearned income rate instead of the student's earned income rate?

[8filltheheart]

I admit to finding this a bit confusing. Can you please explain a little more or link a reference where I can read up on this? My understanding is that any scholarship $$ in excess of tuition and fees needs to be claimed on the student's tax return as income. . .am I correct so far? So, would a program like Turbo Tax automatically calculate any tax based on the parental unearned income rate instead of the student's earned income rate?

It is form 8615.

http://www.irs.gov/pub/irs-pdf/i8615.pdf

Unearned Income

For Form 8615, “unearned income†includes all taxable income other than earned income as defined later. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarshipand fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

It goes on the student's taxes and they are supposedly responsible for it, but it is taxed at the parent's unearned income rate. It is a catch 22. We do not pay any of his expenses at all anymore. He is 100% independent. But, students cannot count scholarship $$ to count toward independent living. So we don't pay any expenses, but he still can't claim himself independent. If he could, he would be taxed at his unearned income rate.

 

Fwiw,I am pretty sure they get to claim their standard deduction against that amt and that it is just the excess beyond that. That is a question my dh would have to answer.

[Teachin'Mine]

It is form 8615.

http://www.irs.gov/pub/irs-pdf/i8615.pdf

It goes on the student's taxes and they are supposedly responsible for it, but it is taxed at the parent's unearned income rate. It is a catch 22. We do not pay any of his expenses at all anymore. He is 100% independent. But, students cannot count scholarship $$ to count toward independent living. So we don't pay any expenses, but he still can't claim himself independent. If he could, he would be taxed at his unearned income rate.

 

Fwiw,I am pretty sure they get to claim their standard deduction against that amt and that it is just the excess beyond that. That is a question my dh would have to answer.

 

Yes, they do get to take the standard deduction (or can itemize if that is to their advantage).

[Pegasus]

Thank  you!  I really appreciate all the input. I'm trying to learn all I can on this topic to be sure that we do everything right and proper while optimizing the overall tax situation.  I did find some discussion on this aspect of taxable scholarships on the TurboTax site. Apparently, they weren't doing it quite right a year ago and got clarification from the IRS.  Their software should be able to handle this situation now.

[8filltheheart]

Thank  you!  I really appreciate all the input. I'm trying to learn all I can on this topic to be sure that we do everything right and proper while optimizing the overall tax situation.  I did find some discussion on this aspect of taxable scholarships on the TurboTax site. Apparently, they weren't doing it quite right a year ago and got clarification from the IRS.  Their software should be able to handle this situation now.

I would make sure you investigate your state laws as well.  Turbo Tax filed our taxes with the scholarship $$ as income and taxed it.  Our state does not tax scholarship $$.