Here's my scenario:
DD's Scholarship: 16,000
Qualified Education Expenses: 12,000
Report method #1:
Since the amount of scholarship is greater than that of qualified education, part of scholarship will be taxable, which is $4,000 (16,000 - 12,000). She will report $4,000 as income. Her incremental tax will be about $600.
FYI: DD has to file a tax return because of other income.
Report method #2.
Split the scholarship into two equal portion, one used on parent's return and the remaining on DD's tax return.
On parent's return:
Apply for
American opportunity Credit on our tax return, reporting $8,000 (from the scholarship) as tax-free assistance and $12,000 as the Qualified Education Expenses. The adjusted Qualified Education Expenses becomes $4,000 (12,000 - $8,000). The credit turns out to be about $2,500.
On DD's return:
Report $8,000 from the scholarship as income. The increased in tax will be about $1,300.
This method provides a net gain of $1,200 (2,500 - 1300) instead of paying $600.
Question: Is this method legitimate? I have spent quite a bit of time on Pub 970 but cannot determine whether this is allowable.
FYI: There's no restriction of how scholarship can be used.
Any comments or suggestions are appreciated.
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