"Loophole" AOTC

Forum|Forum|4 months ago
February 12, 2026
2 replies
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Has anyone come accross the "Loophole" (AOTC)? Not sure how legit it is but it's when scholarships exceed tuition on the 1098T, the student reports more of the scholarship as income which frees up tuition expenses to be claimed for the credit. In my situation, we would report the income on the students return and claim the credit on the parents return. If this is allowed, how do I properly report this on the parents student information worksheet in Proseries?

ProSeries Professional

Best answer by taxiowa

Student worksheet, Part V, Line 4

S

strongsilence

Level 10

Although §117 does not explicitly use the word “elect,” IRS guidance allows a taxpayer to choose to include scholarship in income by treating the scholarship as applied to nonqualified expenses (e.g., room and board), even if the student could have applied it to tuition.

taxiowa

Level 8

This works mostly with Pell grants. The tax-free scholarship must be able to be used by the student for items other than tuition or qualifying AOC costs. This means student can walk into financial aid and simply take pell grant funds home to pay for kitty food or buy a new parrot which is basically the same.

Other scholarships that must be used first or only for tuition cannot be chosen to have student report as income and then let daddy claim more of the AOC. So you have to know if scholarship or grant (in their wording) may be used for kitty food or room/board instead of tuition.