TurboTax won't allow me to pick American Opportunity Credit vs. Lifetime Learning Credit, but the distinction matters!

Question

The feature where TurboTax picks the appropriate Education Credit for you (American Opportunity vs. Lifetime Learning) fails to pick the correct one needed in this very specific situation, which you can recreate with the following scenario:

College-age child's return:

Could be considered a dependent on parents' tax form, but will not be
Meets all requirements for both credits (although doesn't meet "support" test required for refundable portion of AOC credit)
Has plenty of 1098-T tuition expense (even after adjusted for tax-free scholarship grants) to qualify for full amount of either credit, but
Has an income low enough that she only qualifies for an education credit of $1,080 regardless of which credit is chosen (AOC vs. LLC)... any additional credit would push her into refundable territory which she doesn't qualify for.

In this scenario, TurboTax says either credit is available to her and worth the same amount ($1,080), and then it chooses the LLC. And it doesn't let the user override this choice. But this choice of LLC (instead of AOC) causes problems in the parents' return related to their 529 plan (i.e. Qualified Tuition Program, QTP) withdrawals.

Parents' Return:

The college age child is not listed as a dependent
Parents withdrew $26,000 from 529 Plan as indicated on parent's 1099-Q (where "recipient" is the parent)
In the math necessary for ensuring "No Double Benefit" (Pub 970, p. 14) and for ensuring proper "Coordination With American Opportunity Credit" (Pub 970, p. 52), the parents must use the following number that comes from the child's tax return: "Expenses taken into account in figuring education credit", which is Form 8863, Line 27 (for AOC) or Form 8863, Line 31 (for LLC)
The following is the rules for computing the credit from the qualified expenses for the two credits:
- AOC: 100% of first $2,000 (of qualified expenses), then 25% of next $2,000
- LLC: 20% of the first $10,000 with maximum credit of $2,000 per return.
Using the above rules, with the AOC, the "expense taken into account in figuring the education credit" would be $1,080. Whereas with the LLC, it would be 5 times larger, which is: $5,400

Now consider the math:

If the child uses the AOC, the parents' math related to the permissible tax-free withdrawal of their 529 account is:

$40,000 - Total Qualified Education Expenses
(minus) $12,920 - Tax-free scholarships
(minus) $ 1,080 - Expenses taken into account in figuring AOC
(equals) $26,000 - Maximum amount you can withdraw from 529 tax-free

And in this situation, their entire $26,000 withdrawal is tax-free. This is why the parents want for the child to use the AOC credit.

Now, consider what happens when TurboTax is forcing the child to use the LLC credit (as is currently the case)

$40,000 - Total Qualified Education Expenses
(minus) $12,920 - Tax-free scholarships
(minus) $ 5,400 - Expenses taken into account in figuring LLC
(equals) $21,680 - Maximum amount you can withdraw from 529 tax-free

And in this case, only $21,680 of the parents' $26,000 withdrawal would be tax free. Which would force them to pay taxes on $4,320 of that withdrawal.

This is why I consider this a bug. By not letting the child choose the AOC over the LLC, the parents would be forced to pay more in taxes.

Please eliminate this bug so that I can continue to use TurboTax to do our taxes. The bug fix should technically consist of two things: 1) Letting the user specify they wish to use the AOC in this scenario, and 2) Ensuring that the user has the ability to control what ultimately goes into Form 8863, Line 27. The user should be allowed to put a value less than $4,000 (i.e. $1,080 in my example) even if they have $4,000 (or more) worth of expenses.

Hal_Al · Accepted Answer

@AmyC Thank you for the big picture perspective you shared. Regarding your third bullet, are you saying that you still think there's a way I can get TurboTax to use the AOC for my daughters' return (if I wanted to) in her particular scenario? Or are you saying that there isn't really a way to do this, but that I shouldn't worry when considering the big picture? If there is a way, I still haven't found it.

Regarding your concern about not being eligible for either credit if someone CAN claim her. I too saw that statement in the comparison table and it contradicted what I saw in the 2022 version (since the 2023 version isn't yet available) of Publication 970:

https://www.irs.gov/pub/irs-pdf/p970.pdf

For example, on Page 12, it says you cannot claim the AOTC if "you are claimed as a dependent on another person's tax return". And in Figure 2-1 on Page 13, the flowchart says "Are you listed as a dependent on another person’s tax return?"

So clearly the wording in the 2022 Publication 970 document suggests it's not about whether you CAN claim her, but whether you DO claim her. Do you know if something has changed for 2023? I figured I'd wait for the 2023 version of Publication 970 to come out to see if there's still a discrepancy or not. Thanks!

Type letme (no space between let & me) in the search box. Then press enter. Then click on the link "jump to letme''.

TT will give you the option to select the other tuition credit

Another possibility: TT is just using the wrong amount of expenses. 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.

ThomasM125 · Answer

I understand what you mean but I'm not sure about the logistics or time frame for making changes to the program. In the mean time, you can try changing your response to the question regarding being enrolled at least half time or having taken the American Opportunity Credit for four years, a "no" answer to the first question and "yes" to the second will force the lifetime learning credit to apply. Those answers do not appear on the tax return, they are just used to determine which credit you will take.