education credits and financial aid

[AccTaxMan]

Taxpayer's son paid $5,000 qualified education expenses in 2011.

He has also received $6,000 of student financial aid.

His parents gave him $10,000 in 2011 for his college expenses.

He said there is no way to determine which is paid for which because everything goes through the same checking account.

(1) His qualified education expenses were paid by the student financial aid. He used his parents' $10,000 for living expenses. So his parents cannot claim the American Opportunity credit. The student financial aid is not taxable to him because it was used for qualified education expenses.

(2) His qualified education expenses were paid by his parents' $10,000. He used the student financial aid for living expenses. So his parents can claim American Opportunity credit. He will report the student financial aid as income in his tax return (since it was used for his living expenses).

Does the taxpayer and his parents have the freedom to choose either (1) or (2) in their tax reporting?

[Gretel]

Taxpayer's son paid $5,000 qualified education expenses in 2011.

He has also received $6,000 of student financial aid.

His parents gave him $10,000 in 2011 for his college expenses.

He said there is no way to determine which is paid for which because everything goes through the same checking account.

(1) His qualified education expenses were paid by the student financial aid. He used his parents' $10,000 for living expenses. So his parents cannot claim the American Opportunity credit. The student financial aid is not taxable to him because it was used for qualified education expenses.

(2) His qualified education expenses were paid by his parents' $10,000. He used the student financial aid for living expenses. So his parents can claim American Opportunity credit. He will report the student financial aid as income in his tax return (since it was used for his living expenses).

Does the taxpayer and his parents have the freedom to choose either (1) or (2) in their tax reporting?

No, they do not have the freedom. Depends on nature and stipulations of financial aid. Most of the time it has to be used for qualifying education expenses.

1. If student didn't pay also for books ($1,000), this amount will be taxable to him. Probably doesn't matter. Doesn't look like he had any income, or did he? If he paid more than $1,000 for books and other qualifying expenses, parents can claim AOC credit for that amount.

[AccTaxMan]

No, they do not have the freedom. Depends on nature and stipulations of financial aid. Most of the time it has to be used for qualifying education expenses.

So if the student can confirm with the school that the financial aid does not have to be used for qualifying education expenses, he can decide which way to go. Did I interpret your reply correctly?

[Gary2]

By "student financial aid", I gather you mean just grants or scholarships. I've seen cases where "financial aid" is used in a way that includes loans - which would totally change this situation.

[dan doshan]

I wish Congress would either do away with the Education Credits or make the rules so clear that an idiot would have no problem at all understanding them. As things are now it's a mess, in my opinion.
I've agonized over the rules, various interpretations as to just what you could or could not do. who knows what the exact terms of these various scholarships and grants are, can you basically arbritrarily allocate some grants as taxable income to free up for the credit, on and on, etc. etc. TaxPros are all over the map on these education credits. They are probably one of the most abused and or missed opportunities in tax prep.

[Gretel]

So if the student can confirm with the school that the financial aid does not have to be used for qualifying education expenses, he can decide which way to go. Did I interpret your reply correctly?

I am not sure that this is all there is to it. There have been lengthy discussions on this board about this issue with very good information and it would be beneficial to look at them.

[BP.]

By "student financial aid", I gather you mean just grants or scholarships. I've seen cases where "financial aid" is used in a way that includes loans - which would totally change this situation.

Absolutely. Need to determine nature of "financial aid" before determining treatment.

[taxmom34]

student's account statement would have details of all transactions wouldn't it?

[FEDUKE404]

Simple answer

student's account statement would have details of all transactions wouldn't it?

"(S)he who prepareth education credit from 1098-T alone, and consulteth not the actual payment records, truly seeketh an encounter with the IRS."

FE