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Education Credit 8853 AOTC Maximize with Scholarship Funds

Forum|Forum|11 months ago
April 9, 2025
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Hi. I have two students in their first 4 years of college and we meet the income limits for the AOTC. I am trying to figure out how to maximize the credit. I believe I will need to have my students file a portion of the scholarship and grant funds as income on their own tax return. I claim them as dependents and would like to receive the full 1K refundable AOTC and 1.5K nonrefundable amount for each of the students.

The 1098T was provided by the university as follows:

Student 1 - box 1 $7828, box 5- $7255

Student 2- box 1 $5609, box 5- $2400

In addition, a new laptop was purchased for each student ($800 and $1100) during 2024. I don't understand how to include that in the education expense. Likewise, these amounts do not include textbooks/software required for the classes. I wanted a clear connection to the 1098T but that wouldn't be the case if I added those expenses.

The scholarship and grants were partially refunded to student 1 but generally the funds were applied to reduce tuition and fees (no housing costs or textbooks) . There are no specifications on the scholarships or grants about what they must be used for.

My questions are essentially:

1) What amounts for box 5 should I have each of the two students file under their own return to maximize AOTC? Can I include partial amounts from box 5, splitting it between the parent and student returns?

2) How would I include the laptop and textbooks in the box 1 amount? Or is that irrelevant since we exceed 4K per student?

3) Would the box 5 amounts be listed on the student return as SCHOLARSHIP since I don't have a W2/1099?

Thanks in advance for your help.

Ask the Experts - Tax Due - April 2025

Best answer by Hal_Al

What are your additional amounts for textbooks/software required for the classes?

For student 2, you have 5609 tuition + 1100 computer = $6709 expenses less $2400 scholarship = $4309 net qualifying expenses. That is more than the $4000 (not $2500) you need to get the $2500 maximum AOTC. Student 2 does not need to declare any of his scholarship as taxable.

You enter his 1098-T, on your return and enter $1100 at "other education expenses". TurboTax calculates the max AOTC.

For student 1, You could use those book-software expenses. 7828 + 800 = $8628 -7255 = $1373. Student will currently have to declare $2627 of his scholarship as taxable.

The simple way to enter this on your return, in TurboTax (TT), is enter a 1098-T with $4000 in box 1 and box 5 blank. On his return, enter a 1098-T with 0 in box 1 and $2627 in box 5.

Theoretically, TT can calculate all this, without the "simple way", but I have seen too many mistakes, here in this forum.

You must enter the taxable scholarship in the 1098-T section, not as other income. "Other income" is unearned income and will get taxed.

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450). It is not earned income for the kiddie tax and other purposes (e.g. EIC).

Taxable scholarship goes on line 8r of Schedule 1, from which TT treats it as hybrid income.

Technically, the student is not even required to file, because his "earned income" is less than $14,600. But, you may want to have him file to document the reporting of the scholarship as income.

B

Bsch4477

Employee

What, if any, is the earned income and investment or other income for each student? This is important since if neither has a filing requirement they would not have to file a return at all. Remember that the 1098-T is only an informational document and what you report doesn’t have to be what is on that form. In other words, the IRS does not match it as in the case of a W-2 or 1099.

R

RobertB4444

1. Only the first $4000 is used to figure the credit. So you would need to add $3427 to student one's taxable income and you don't need to add anything to student two at all. Student 1 will only need to file a return if their income is greater than that scholarship by $9,793.

2. It is irrelevant but the system will ask you about education expenses not included on the form.

3. Yes. They would be entered as though the student had a 1098-T with zero tuition and the scholarship amount in box 5. That carries the income over to other income.

[Edited 04/10/25 07:31 AM PST]

@taxes54321

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T

taxes54321Author

Thank you both. I really appreciate your help.

Student 1 has 2K of earned income.

Student 2 has $500 of earned income.

I was only planning for the students to file for the purpose of reallocating the box 5 1098T scholarships.

So, following your reply to quesiton 1, I would add SCHOLARSHIP $1927 to student one's tax return.

My confusion all along has stemmed with the data on the 1098T. If I understand correctly, the 1098T data does not sync with my tax return or my students'. The online tax prep program seemed to be reducing the value of the credit once I entered box 5 numbers. That's why I thought I needed to reallocate the box 5 numbers to a student tax return as scholarship income so that the AOTC was not reduced on my end. Can I simply not include the box 5 numbers on my return? This didn't seem like the correct way to handle it, thus my question to you! Sorry if I am overcomplicating this.

Thanks again.

@RobertB4444 @Bsch4477

R

RobertB4444

Leaving off the scholarship is cheating. And if adding in the scholarship brings the tuition paid to below $4000 then you will for sure not get the full AOTC.

Neither of your kids needs to file a tax return.

Also, keep in mind that no person can qualify for the AOTC for more than 4 years.

[Edited 04/10/25 07:33 AM PST]

@taxes54321

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Hal_AlAnswer