The first determination every parent needs to make when filing their tax return is whether their college student qualifies as their dependent. While most parents will tell you that yes, I/we are supporting them, the IRS has rules of determination. If you have already gone through the general dependency rules and determined that, for this purpose, your child is your actual dependent, then you need to further that inquiry from a “support” standpoint. If you are unsure how to do this, the IRS has a nice worksheet titled Worksheet for Determining Support and is searchable from the irs.gov website. If you and your college student disagree on dependency, this worksheet can help. Scholarships and grants do NOT count as income to your student.
If you find that your student is in fact, your dependent, this will allow you, as parents to claim the education credits. If your student is NOT your dependent, then the deduction belongs to them and it will have to be determined whether they get to claim the deduction. Regardless of who has the right to the credit, further calculation will be needed to determine if it can be claimed.
Once you have this part of the equation settled, we can move on to the nuts and bolts of the calculation. Most students will receive a 1098-T, and that will need to be provided to your tax professional. However, the form is virtually useless in properly determining the amounts paid and received. The paperwork you need to provide to your tax professional is your Bursar’s statement. This statement lines out what was paid and when, as well as scholarship payments and expenses for room/board, tuition, meals, books, etc.
Not every expensed line item is considered for education credit purposes.
For the American Opportunity Credit (AOTC) and the Lifetime Learning Credit (LLC), only tuition, required enrollment fees and course materials can be considered and must be reduced by the amount of scholarships/ grants received.
When it comes to scholarships and/or grants received, it is important to determine the nature of the payment. It is also vital to understand whether these amounts are paid directly to the educational institution or to the student themselves. Some scholarships and grants are specific in what expenses they are paying. Some will pay only tuition; others are meant to assist with room/board/meals or general expenses. It is vital to understand the structure of the payments so we can decide whether it reduces the qualified education expense.
When it comes to filing your tax return, the details matter. Next to EITC claims, education credits are the most audited item for simplified tax returns (those with basic W-2’s claiming dependents). Providing your tax professional with the proper information is the best way to protect yourself against this type of audit.