Grants and the AOC

[FEDUKE404]

Confusion still reigns

Kudos to dkss for the extensive research. My conclusion is it would take a tax attorney to figure out all of the nooks and crannies there.

However, I still choke a bit on "not" using the Pell Grant (and similar grants if available) to offset the "qualifying expenses" to be used for the AOC.

Are you SURE that is an option? My main confusion is that since, apparently, the Pell Grant is (by definition) deemed to be tax-free, can a recipient "choose" to call it taxable and thus otherwise create some taxable income (but likely untaxed!) resulting in then receiving some IRS money (including refundable credits) due to artificial AOC qualification?

I completely concur there is some wiggle room for how to treat scholarships (taxable/untaxable amounts) but I am not yet convinced that option even exists when a Pell Grant is in place to pay ALL of the qualifying educational expenses as reported on a Form 1098-T. I even made a quick run through Pub 970 and found no definitive answer.

Also, the overall facts of this example still make little sense in relation to money received versus expected education expenses, especially when room/board should be a non-issue for a local community college where the student also has a family. Something just does not pass the smell test - but that is a topic for another discussion.

I did some quick looking around (time is limited) and even found this:

Q: What if expenses are paid with tax-free aid, such as the Pell Grant?
A: If the grant or scholarship is tax-free (as a Pell grant is) you cannot use the portion of expenses paid by that award to figure the credit. If you had expenses beyond the award amount, use that portion for the credit. Other tax-free aid includes scholarships, fellowships, employer provided educational assistance and veteran’s educational assistance.

FE

[dan doshan]

I wrote a post in regards to dkss post but must have forgot to submit. Anyway, disregarding that, the NATP stuff has been known information forever. However, in my opinion the answers, examples, etc. are confusing and not particularly clear or applicable to real life situations.

Real Life ... A client comes in with a 1098T that shows 5,000 in qualified expenses and 7,000 in scholarships and grants. What do you do as a taxpreparer? Some just go ahead and apply say 4,000 to taxable income freeing up 2,000 for the AOC. On what grounds do they do this. What client that you have ever had could actually furnish you with any documentation as to what exactly were the terms of any of these scholarships and grant. In the years since the Hope Credit came into existence I have had only 1 single client that could. None of the others had any clue whatsoever no matter how much I may have encouraged or questioned them on this.

[FEDUKE404]

Playing the game

....Real Life ... A client comes in with a 1098T that shows 5,000 in qualified expenses and 7,000 in scholarships and grants. What do you do as a taxpreparer? Some just go ahead and apply say 4,000 to taxable income freeing up 2,000 for the AOC. On what grounds do they do this. What client that you have ever had could actually furnish you with any documentation as to what exactly were the terms of any of these scholarships and grant. In the years since the Hope Credit came into existence I have had only 1 single client that could. None of the others had any clue whatsoever no matter how much I may have encouraged or questioned them on this.

Most of us here agree any Form 1098-T is basically a worthless piece of paper.....and that's being kind.

In answer to your point: Since most schools now report "billed" and not "paid" qualifying expenses, then the burden is on the client to provide what was paid when, to include the scholarship issues as different time periods may be involved.

As discussed previously, there is some confusion over how/whether a person can arbitrarily designate grants/scholarships as "taxable" in order to benefit from the AOC.

I will continue to follow this thread in hopes of a definitive answer.

FE

[dan doshan]

I don't have any problem with the arbritrarily including any amounts of grants in taxable income. I don't think that is an option at all no matter how you read the rules and regs. As I would understand things, you only could allocate amounts if the terms of the scholarship or grant stated that funds were unrestricted and could be used to pay for any school expenses including room and board (then what amount would one use for schools that have no such cost.)

My point is that find a client that can furnish you with such information. Good Luck. I don't think it is my job to research their scholarships and grants. I also don't think State or Pell grants are given for one to use some of the funds to go to Vegas and have a ball.

[dan doshan]

Can't resist giving another example. Someone gets 5,000 in scholarships and grants for college. They have 5,000 dollars in various qualified expenses, tuition, books, fees, etc. they also take out 5,000 in student loans. The student does not work or works very little and lives at home while attending college. Now we say well ... we'll just arbritarily assume that the 5,000 in student loans was used to pay for the qualified expenses and the 5,000 in grants was used for other living expenses and report the 5,000 in grants on the students tax return with little or no tax liability. The parents claim the child's exemption and get a 2500 dollar credit. Somehow I don't think that was the intent or the reading of the code and regs.