American Opportunity tax credit

Forum|Forum|2 years ago
March 29, 2024
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My daughter's 1098 -T has tuition in box 1 for 2023 and winter 2024 but in box 5 it does not show a scholarship from the school for winter 2024. Do I need to adjust this or can I just use the 1098-T as is as next years 1098 T will show an additional amount in box 5?

Hal_Al

Employee

Q. My daughter's 1098 -T has tuition in box 1 for 2023 and winter 2024 but in box 5 it does not show a scholarship from the school for winter 2024. Do I need to adjust this or can I just use the 1098-T as is as next years 1098 T will show an additional amount in box 5?

A. Adjust it, since you know there's a mismatch.

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income.

If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2023 expenses".

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

kackjAuthor

The scholarship money was not posted until January 2024. Can I just wait to recognize it on next year's tax return? Thanks

Hal_Al

Employee

Q. The scholarship money was not posted until January 2024. Can I just wait to recognize it on next year's tax return?

A. It depends on the definition of "can". You should report your taxes as accurately as you can. Will the IRS accept the 1098-T as proof in the case of an (unlikely) IRS inquiry. Probably.

Either way, you can claim the American Opportunity Credit, even if the student has too much scholarship.

There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship. You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit". PUB 970 even has examples of how to do the “loop hole”.

KrisD15

You can enter the 1098-T as it is reported but be aware that eventually you might get a 1098-T with an amount ONLY in Box 5 which will show as taxable income.

Box 1 should show what the school received. If the scholarship didn't post and therefore is not in Box 5, that amount should not be included in Box 1 unless you paid that out-of-pocket.

Use the student account statement and adjust the 1098-T to reflect what the statement shows.

@kackj

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kackjAuthor

Thanks. Next year she loses school scholarship since it was only for the first two years. So I should be fine with box1 still being higher than box 5.