Scholarship exceeds tuition: How to allocate it best? Can either of us take education credit?

My daughter graduated last year and got a job.

By "last year" I assume you mean 2018. Since she had a job, if she has more than $4,100 of taxable income for the year, you need to be careful here. You may not meet all of the requirements to claim her as a dependent on your 2018 tax return.  To claim her as a dependent:

 - She must have been enrolled as a full time student for any one semester that started in the tax year for at least 5 months. If she graduated on May 1st, then you get to count the entire month of May.

 - She must *NOT* have provided more than 50% of her own support for the *entire* year. (Scholarships, grants, 529 funds, gifts from Aunt Mary do not count for the student providing their own support.)

- She must be *UNDER* the age of 24 on Dec 31 of the tax year.

Take special note that there is no requirement for the parents to provide any support. Not one penny. The support requirement is on the student. A concern here is that she may "in fact" have provided more than half of her own support for the entire year, if she got a job right after graduation.

Her scholarship last year exceeded her qualified tuition and related expenses on Form 1098T by over $3000.

Then there's no question that your daughter will report all education expenses on her own tax return. The excess scholarship money not used for qualified education expenses will be taxable income to your daughter. She will pay taxes on the excess - not you.

It covered not only tuition and educations expenses, but also a share of room and board. In addition, she spent a few hundred dollars on books and other supplies.

Scholarships can only be used for the qualified education expenses of tuition, lab fees and books. That's it. Any scholarship money used for anyting else, including room & board is taxable income to the student.

Now grants are different. The rules on what a grant can be used for are the same as for a scholarship, unless specifically and explicitly stated otherwise in the grant award letter. So grant money can be used for room and board if the aware letter specifically and explicitly states that category as one the money is intended for.

1) I understand that she must declare excess scholarship income, but there were some instructions saying that perhaps the scholarship could be allocated between tuition and room and board to be most advantageous. How can we do that? I can't figure it out from the instructions.

Only 529 funds and grants specifically designated in the award letter for room & board can be used for room and board. So if there are no 529 funds involved and you don't have a grant letter authorizing it's use for R&B, this is a moot point.

Hey @Critter did I miss something here on the work-around for the AOTC? Please jump in if so.

2) Can we, her parents, still take the AOTC? Who takes it, and how do we figure out how much to take?

If she qualifies to be claimed as your dependent and you actually claim her as your dependent, then you can claim the AOTC provided it has not already been claimed in the four previous calendar years. Remember, schools work in academic years while the IRS works in calendar years. So the reality is, it takes you five calendar years to get that four year degree. If she graduated in 2018, then that was most likely her 5th calendar year. If the AOTC was already claimed in the previous 4 calendar years, you can't claim it again.

However, the Lifetime Learning Credit can be claimed.

If you do not claim your daughter as a dependent, then you can not claim the AOTC or LLC. In such a case, your daughter can claim the one she qualifies for, provided she is not claimed as a dependent on anyone else's tax return.

Finally, please wait for @Critter to see if he jumps in here. He knows something about a loophole for the AOTC that I don't. It may or may not apply to you. Basically, if the AOTC has already been claimed in each of her first four years of college, then you can forget it because it can't be claimed again.

Hi,

Would you please tell me how to do it for my situation? I'm the student filling married jointly. I have 12k in box 5 and 4k is in box 1. Our income 45k - from my husband’s job. I would like to claim educational credits if possible, all examples are for parents claiming their kids 1098-t. TIA

Hello, I am the parent of a college student whose 1098-T shows more grant money than tuition; however, this is a need-based grant that was also awarded to meet full financial need (including room and board). 

The grant money exceeds the stated billed amount by about $3k. We also had 529 distributions (used for educational expenses). 

We claim my daughter as a dependent. TurboTax walked me through some scenarios where I could allocate that our (parent) out-of-pocket expenses went to tuition, and the school grant partially paid room and board (not untrue) to qualify for the AOTC.

The problem arises when I input the 1098 info in my student’s taxes (TurboTax asks for this). She only made $700 from a summer job W2. Grant money was $3k above tuition. TurboTax is taking all 529 distributions and taxing it, plus taxing the 1098-T numbers on my daughter’s return. (Saying she owes over $2,000 in federal tax). 

This can’t be. At best, she made $3700 (grant excess plus job). Moreover, I think we may already have paid unnecessary taxes on these 529 distributions. Since when are they taxable income? Any help would be appreciated!