American Opportunity Credit - confused about dependent's tax situation with scholarships

Thanks for explaining that! One thing I'm confused about - if scholarships that exceed qualified expenses are considered taxable income for him, shouldn't his tax bill be way higher than just $15? That's like $18,300 of taxable income based on your calculation. Also, does this mean I should be claiming the American Opportunity Credit on my return even though he's the one who received the 1098-T form? The software didn't seem to catch this.

The $15 tax bill makes sense because of the standard deduction. From that $18,300 of taxable scholarship income, subtract the standard deduction (approximately $12,950 for 2024), leaving only about $5,350 taxable. At the lowest tax bracket of 10%, that's roughly $535. Then factor in his earned income from the part-time jobs, which likely had taxes withheld already, and any credits he might qualify for, and you end up with just $15 owed. Yes, you should claim the American Opportunity Credit on your return, not his. Since he's your dependent, you're entitled to the education credits even though the 1098-T is in his name. Make sure you enter his 1098-T information on your tax return. This is a common oversight that tax software doesn't always catch automatically.

How exactly does taxr.ai work? Do you just upload the 1098-T and it explains everything, or do you need to provide more documents? My daughter's situation is similar but she also has income from an internship and I'm completely lost about how to handle everything.

I'm skeptical about these online tax tools. How is this different from just using regular tax software? Feels like they all just ask the same questions and give generic answers. Did it actually catch something that TurboTax or H&R Block wouldn't?

You upload whichever tax documents you have questions about - I uploaded the 1098-T, my daughter's W-2s, and some scholarship statements. Within minutes, it analyzed everything and provided specific guidance about how each document affects the tax return. It even pointed out specifically how the scholarship amounts above qualified expenses would be treated. It's completely different from regular tax software because it specifically analyzes your documents and explains the implications in plain language. Regular tax software just takes inputs and calculates, but doesn't explain the "why" behind things. For example, it pointed out that my daughter's internship income combined with her taxable scholarship portion was still mostly offset by her standard deduction, which is why her tax bill was low. TurboTax never explained that to me.

Wait, does this service actually work? How can they get you through to the IRS when everyone else is waiting for hours? Seems too good to be true.

I don't buy it. The IRS phone system is completely broken - I've tried calling them 5 times about education credits and never got through. No way some service can magically fix that. And even if you do get through, the IRS agents give different answers depending on who you talk to.

The service basically navigates the IRS phone system for you and holds your place in line. When they reach a live agent, they call you and connect you. It's not magic - they're just doing the waiting part for you. It definitely works, and I was suspicious at first too! The agent I spoke with was really knowledgeable about education credits specifically. She explained that the American Opportunity Credit can only be claimed by the person claiming the student as a dependent, and walked me through exactly how to report the taxable portion of scholarships. Having someone from the actual IRS confirm everything gave me total confidence in filing correctly.

That's really helpful! Does my son need to have paid for the books himself, or can we include books that I paid for? Also, do we need to have the actual receipts or is a credit card statement enough proof?

Since your son is your dependent and you're the one claiming the American Opportunity Credit, you can include the cost of books and supplies regardless of who actually paid for them. What matters is that they were required for his enrollment or attendance at the educational institution. Credit card statements can work as documentation, but they're not ideal. The best evidence is itemized receipts that clearly show what was purchased. If you don't have all the receipts, a combination of documentation works - syllabus showing required materials, credit card statements, emails confirming purchases, etc. The IRS wants to see that these were legitimate educational expenses, so the more specific your documentation, the better.

Thanks for pointing this out! How did you figure out which portion was loans vs scholarships? My daughter's financial aid letter lumps everything together and it's super confusing.

The easiest way is to look at your daughter's student account portal online - most schools break down financial aid by type (grants, scholarships, federal loans, private loans, work-study, etc.). You can also check the 1098-T form itself - it should only include actual grants and scholarships in box 5, not loan amounts. If you're still unsure, contact the financial aid office directly. They can provide a detailed breakdown of what counts as taxable vs non-taxable aid. Federal student loans (Stafford, PLUS, etc.) and private educational loans are never taxable income since they have to be repaid.