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How to create an American Opportunity Tax Credit by changing $4,000 of non-taxable 529 money to be taxable. 1098-T, 1099-Q, AOTC

Forum|Forum|5 years ago
March 19, 2021
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Hi,

Having unsuccessfully spent a lot of time reading and talking to many TurboTax live helpers, I’m hoping the experts I see on this Community will be able to clarify how I can help my daughter work within TurboTax to maximize a tax benefit.

Backgound:

My daughter graduated from college in May of 2020. She lives on her own and pays for more than 50% of her living expenses for this year and will be filing as an independent person. I will not and can not claim her on my taxes.

We have entered the following information into TurboTax:

1099-Q

Box 1 $20,835 Gross Distribution

Box 2 $15,400 Earnings

Box 3 $5,434 Basis

1098-T

Box 1 $24,980 Payments received for qualified tuition and related expenses

Box 5 $10,000 Scholarships

On the the “Here’s Your Education Summary” page, we have entered in the “Other Education Expenses”:

$5,589 for Room & Board

$266 for books

So, the entire Gross Distribution goes to fund the remaining $14,980 of qualified tuition plus the $5,855 for Room & Board and books equal $20,835. The 1099-Q distributions evenly pay her expenses.

Question! How can we, through TurboTax, work with the 1099-Q money to figure out a $4,000 amount to be taxable and thereby allowing my daughter to claim a AOTC credit. Can we draw from the already taxed “basis” amount? What is best and allowable? Penalties? Also, how would I know for sure this is more beneficial and doesn’t have some unforeseen consequence?

This has been such a difficult part of the tax filing for my daughter with wildly different Federal refund numbers coming up dependent on how we’ve entered information, and varying scenarios of not entering 1099-Q (as we’ve seen that on some posts).

We will be very grateful if some of you expert tax people would be so kind as to help us walk through this final piece of her tax return. Thank You in advance!!!

Best answer by Hal_Al

Graduating in May usually means that 2020 was her 5th calendar year of college. There is a four time limit to claiming the American Opportunity Tax Credit (AOTC) on a student's education. So, if you already claimed 4 AOTCs, she is prohibited from claiming it in 2020. She can claim the less generous (and non refundable) Lifetime Learning Credit (LLC).

Assuming you haven't claimed it 4 times, there's another issue: A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if she supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. She will be asked the earned income support question in the personal info interview.

Assuming that's not a problem, we need to know who was the "recipient" of the 1099-Q, you or her? That determines who's return the 1099-Q is entered on. Who's name and SS# are on the 1099-Q?

Here's an example of how it will work:

$30835 in educational expenses(including room & board)

-$10000 paid by tax free scholarship

-$4000 used to claim the American Opportunity credit

=$16835 Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $20,835

Box 2 is $15,400

16,835/20,835 = 80.8% of the earnings are tax free; 19.2% are taxable

0.192 x 15,400 = $2956

You have $2956 of taxable income to report . None will be subject to the 10% non-qualified distribution penalty because the non qualified portion of distribution was used to claim a credit

M

mglauner

If the entire 529 distribution was used for Qualified Education Expenses (including room and board in this instance), you don't have to enter it in a tax return.

Based on the1098-T info you gave (Box 1, $24,980; Box 5, $10,000), she will be eligible for the American Opportunity Credit.

Click this link for more info Form 1099-Q.

H

Haven2025Author

Thank you for responding to my question!

As I understand it, eligible expenses for the American Opportunity Tax Credit do not allow room and board but only tuition, college fees and books/computer expenses. This is why I was looking for a work around. If I’m not correct on this, please let me know:)

Hal_AlAnswer

Employee

Graduating in May usually means that 2020 was her 5th calendar year of college. There is a four time limit to claiming the American Opportunity Tax Credit (AOTC) on a student's education. So, if you already claimed 4 AOTCs, she is prohibited from claiming it in 2020. She can claim the less generous (and non refundable) Lifetime Learning Credit (LLC).

Assuming you haven't claimed it 4 times, there's another issue: A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if she supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. She will be asked the earned income support question in the personal info interview.

Assuming that's not a problem, we need to know who was the "recipient" of the 1099-Q, you or her? That determines who's return the 1099-Q is entered on. Who's name and SS# are on the 1099-Q?

Here's an example of how it will work:

$30835 in educational expenses(including room & board)

-$10000 paid by tax free scholarship

-$4000 used to claim the American Opportunity credit

=$16835 Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $20,835

Box 2 is $15,400

16,835/20,835 = 80.8% of the earnings are tax free; 19.2% are taxable

0.192 x 15,400 = $2956

You have $2956 of taxable income to report . None will be subject to the 10% non-qualified distribution penalty because the non qualified portion of distribution was used to claim a credit

H

Haven2025Author

Thank you Hal_Al for the very clear, detailed response. Much appreciated.

* The AOTC has only been claimed for 2 years

*Good to know that she is only eligible for the refundable portion of the AOTC which I understand to be $1,000

* Not sure what the “earned income support question in the personal info interview” means. A form to be completed? She will have earned income of about $29,000 which is more than half of her total support for the year and she lives on her own.

* My daughter is the recipient of the 1099Q and it has her Social Security number noted.

I so appreciate the example of how this would work. Since my original numbers were real, I think we’ll use your analysis and numbers. We have previously put all of the 1099-T, 1099-Q information into the TurboTax online account. Does all of that stay as is? How would we indicate the taxable income of $2956? And what entry needs to be put in to generate TurboTax to recalculate and recognize the AOTC?

Can’t thank you enough for your time and knowledge!

Hal_Al

Employee

@Haven2025 said: "Good to know that she is only eligible for the refundable portion of the AOTC which I understand to be $1,000"

No, it's just the opposite, she would only get the non-refundable portion. But that doesn't matter in her case, since more than half her support came from earned income. Because she is under 24, the earned income support question in the personal info interview should come up. There is no form to be completed. She just answers yes. She will get both the refundable and non refundable portions.

Q. We have previously put all of the 1099-T, 1099-Q information into the TurboTax online account. Does all of that stay as is?

A. Yes. Be sure you entered room and board and books.

When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount ($4000) you want to use or change it*.

If everything is entered correctly, you should get the result above. The $2956 goes on line 8 of Schedule 1. The refundable portion ($1000) of the AOTC goes on line 29 of form 1040 and the non refundable portion on line 3 of Schedule 3.

*If TT doesn't present that screen, Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary". Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it. You may reach that screen sooner.

G

GabiU

Community Manager

@Haven2025 To have this reviewed by our product team, we will need to see a sanitized version of your return. It's extremely helpful as we do research on your experience.

If you're using TurboTax Online, follow the directions below:

1. Sign into your online account.
2. Locate the Tax Tools on the left hand side of the screen.
3. A Drop down will appear. Click on Share my file with agent.
5. This will generate a message that a diagnostic copy will be created. Click on OK, the tax file gets sanitized and transmitted to us.
6. Please provide the Token Number that was generated onto a response.

Thank you! I hope to hear from you soon.

GabiU

**Say "Thanks" by clicking the thumb icon in a post **Mark the post that answers your question by clicking on "Mark as Best Answer"

Hal_Al

Employee

@Haven2025

I reported the fact that TT is not coming up with the correct results. I think that's why TT employee @GabiU is getting involved here.

H

Haven2025Author

Hal_Al,

Thank you for alerting me on this communication. We have not been able to locate the worksheets. I’m thinking they are not available to us as my daughter is filing via IRS Free File Program delivered by TurboTax since her income is low. Perhaps she’ll have to move into a paying level. We will wait to hear what GabiU and team report back to us. We appreciate your time and interest in this situation:)