Education Credit

[Possi]

"My college tuition was paid with the GI bill, but I have student loans that pay for my living expenses while I am in college. My friend told me to be sure and tell you that because we can take all the money I borrowed from student loans as 'education credit' on the new American Opportunity Credit!"

...imalittlepunchytonight...

[Koss]

America Opportunity Credit

What he's been told is inaccurate, of course.

For the AOC, he can take a credit for books and other course materials, including something such as a computer, that may not have been paid for by the GI bill. The AOC does not allow a credit for "living expenses," or for room and board.

The idea that the credit is somehow driven by the amount borrowed is absurd.

However...

This may be one of those cases...

He may be able to elect to treat the GI bill as a taxable scholarship, and report it as income on Line 7 of Form 1040. By doing so, he is taking the position that the GI bill funds were used to pay ordinary living expenses, and that the money he borrowed was used to pay the tuition. Depending on what other income he has, and how much he received under the GI bill, this might make sense.

My limited understanding of the GI bill is that the use of the money is not restricted to tuition, and it is generally not paid directly to the institution; rather the funds are paid directly to the veteran. The payment is contingent upon the veteran being enrolled, but he gets to choose how to use the money. In other words, he would get the GI bill money even if he also had some other scholarship that paid every penny of the tuition.

This makes it very reasonable to treat it as a taxable scholarship, and apply the loan funds to the payment of the tuition. If the numbers are right, he might just max out on out the AOC, to the tune of $2500, while paying little or no income tax on the GI bill, even after reporting it on Line 7.

BMK

[Gary2]

He may be able to elect to treat the GI bill as a taxable scholarship

Unlike other unrestricted scholarships, GI Bill benefits are never taxable, even if used for housing. See Pub. 970, page 6, under Veterans' Benefits. (And no, I'm not an expert, and don't have an eidetic memory. I just came across this a few days ago, and I know there are enough special cases for the military that it was worth taking an extra minute to look it up.)

[Possi]

Worthy of discussion

Well I guess it is worthy of discussion because we are seeing so much of the GI Bill these days. Now that the GI Bill money is easily transferred to dependents, that is.

I just had a gal who said GI Bill paid 100% of her school, but she paid up front and they reimbursed her. The 1098T indicated it was all hers and if I didn't specifically ask whether or not it came out of her pocket, would have taken it as her expense.

Couldn't anyone claim it was for paying bills and the tuition was theirs to benefit from?

I mean, what do you do? Don't ask? Ask and if the money was paid to the taxpayer and not the institution, tax the "free" money and take the education credit?

I want the best slant for the client, but I sure don't want this REFUNDABLE tax credit to BACKFIRE on me.

[Gary2]

Let me elaborate on my previous note. The GI Bill benefits are never taxable. You can't just decide to tax them in order to claim the AOC.

However, it is only the benefits that are required to be spent on education expenses that must be subtracted from the total qualifying expenses. If the student is also getting living expenses (BAH - Basic Housing Allowance), you get the best of both worlds. The BAH is not taxable, but it also does not count as being spent on qualified education expenses.

So if tuition is $5K, but the VA pays $4K earmarked for tuition and $1K BAH, you still get to claim $1K in qualifying expenses for AOC, and you don't have to pay taxes on the $1K. It doesn't matter whether you send the $1K to the school for tuition the instant you receive it, use it to pay the landlord, or put it into savings while living in a tent. (At least for tax purposes - I have no idea if the VA has requirements on how the BAH is spent.)

This is all out of Pub. 970, reworded.

[Possi]

wow

Thanks for the enlightenment..
I have seen a LOT of GI bills this year, and would never have thought to ask whether or not a portion of the payment was BAQ. Now I can slice and dice and maybe win some refunds more effectively.