Claiming AOTC with scholarships +529 distributions

Question

I’ve been working to amend our children’s 2018 tax returns so we can claim the AOTC that we missed that year. I now understand that we can have our children claim partial scholarship or 529 funds as income in order to claim the credit. I’m a little stumped how to make the changes to my daughter’s return as we used a combination of scholarships and 529 funds and could use some help.

The 1098-T from her school reads box 1: $13502; box 5: $12695

The 1099-Q is in our daughter's name. 1099-Q box 1: $4544

Total educational expenses: $17370

tuition & fees: $13502

books: $388

room & board $3480

From her 529, we took out just short of the amount needed to cover her educational expenses minus her scholarships. We paid $131 out-of-pocket. Daughter had ~$7500 in earned income from summer jobs for that year as well.

One of her scholarships was a Pell grant and the terms for the others state that the financial aid awarded can be used for payment of tuition, books, housing costs, transportation, and other related educational expenses.

So, I’m not sure how to go about claiming the AOTC. Do I just have her claim $4000 of the scholarship as taxable income? Or does she have to claim the 529 distributions we used to pay for tuition and fees not covered by the scholarship, and then claim a smaller percentage of the scholarship to make up the difference? And depending on the answer, where should this information entered in TurboTax? I found a screen that asks, "Did you pay for room & board with a scholarship or grant?" and also one at the end of the Education section that asks for the "Amount used to calculate education credit."

I read in a past post that you want to report scholarship as taxable income over 529 distributions as it is treated as earned income, for purposes of the standard deduction calculation. I’ve been looking at this stuff for hours and just keep getting more confused. If anyone can offer some guidance, it would be greatly appreciated!

KrisD15 · Accepted Answer

Thanks for sticking with me on this confusing topic! I really appreciate the assistance!

I was able to successfully include the scholarship in her income and add "SCH" and the amount 2805 to line 1 of her 1040. As you stated, her AGI went up but her taxes did not change because she is still under the threshold. I assume I still need to send in her amended taxes to show she is claiming the scholarship money to back up the AOTC claim on our amended return even though her taxes did not change? She did file taxes in 2018 because her summer employer withheld taxes for some reason and she just free filed and received a full refund. Her state taxes did go up a little with the increased AGI so I'd probably need to amend her state return.

One last question: Are my numbers above to claim the scholarship amount of $2805 as income correct? Do I have to account for the fact that $1064 (distributions $4544 - room & board $3480) of the 529 was applied to the tuition bill in my figures? Or are we just dealing with the $12695 scholarship here? I just want to make sure I'm doing the math correctly before mailing these out.

If her Federal tax liability did not change, you do not file an amended return for your daughter. If the state tax went up, you will need to file an amended State return.

As far as the numbers, I follow the 2805 Scholarship, but what about the distribution? If you took 4,544 from the 529 plan, but used it for only 3480 room and board, what happened to the additional 1064 distribution amount?

The earnings on that portion would be taxable for the student if the 1099-Q was issued in her name.

The calculation is a bit complicated, which is why I suggested entering 3,869 scholarship income on the student's return, HOWEVER your program generated 555 for the distribution, so enter that on the student's return in addition to the 2,805 scholarship income

2,805 goes to her 1040 line 1 HOWEVER the 555 distribution goes to line 8.

If this changes her tax liability, file the amended return. If it doesn't, just keep everything together with your tax files.

Enter the 555 on the students return:

Return to the income section

Scroll down to the VERY LAST option "Less Common Income" and click Show more

On this new drop-down list scroll down to the VERY LAST option "Miscellaneous Income" and click REVISIT

Now scroll down to the VERY LAST option "Other reportable income" and click Start

Select YES on the "Any Other Taxable Income?" screen

Type "Taxable 529 distribution" and the amount 555.

Although the difference was 1,064, you are only taxed on the earnings, so part of the 1,064 was a return of your contribution and 555 is the earnings.