1098-T scholarship exceeds expenses - who files on tax return. student or parent

[clownpixie]

I plan on claiming my college student as a depended and entered the 1098T and it says the scholarship exceeds education expenses. She has very small income on her W2. Does she now enter the 1098T for the taxable portion from the 1098T? It says that if I claim her as a dependent I enter the 1098T. If she enters the 1098T can I no longer claim her? 

[ErnieS0]

You can claim your daughter as a dependent even if she enters Form 1098-T on her tax return. Make sure she tells TurboTax that she can and will be claimed as a dependent.

Only the person claiming your daughter can claim the education credit. This does not matter if TurboTax is calculating taxable scholarship income. There is no education credit in that case.

If the income is very small, double-check your education expenses. Did you miss anything that might eliminate that small amount?

Related Resources:

• Education Credits: Questions and Answers

[clownpixie]

Thank you. It isn’t allowing any education credits. I’m not clear why. The income is below the threshold so I assume it’s because her scholarship exceeded her allowable expenditures since dorms don’t count.

[Hal_Al]

Q. Who files the 1098-T on tax return. student or parent?

A.  It depends. It could be one of you.  It could be both. It could be neither.

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or deduction or possibly your student has taxable scholarship income.  At first glance, it appears your student has taxable scholarship and she should enter the 1098-T on her return.

Q. Can I still claim her as a dependent?

A. Yes.  Where the1098-T goes is irrelevant to the dependency issue.  

Q. It says that if I claim her as a dependent I enter the 1098T?

A. What that means is that since she is your dependent, only you can claim the tuition credit or deduction. So, if you were eligible for the credit, you would enter the 1098-T.

If her W-2 income plus the taxable amount of scholarship is less than $12,400 (and she has no unearned income or withholding in box 2 of the W-2), she does not need to file a tax return. 

But wait, there's more. 

There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket. She would only need to report $5000 of taxable scholarship income. 

[clownpixie]

Thank you! Any idea why I don’t qualify for an education credit? I’m below the income threshold. Is it because the scholarship is greater than qualified expenses?

[Hal_Al]

Q. Any idea why I don’t qualify for an education credit? Is it because the scholarship is greater than qualified expenses?

A. Yes. You have not paid for any qualified  expenses because it was all covered by tax free scholarship. But, see "loop hole" above.

For specifics on how to enter, provide the the following info:  Is the scholarship restricted, that is, must it be used for tuition? What's in boxes 1 & 5 of the 1098-T?  Who much was paid for books, computers" not included in box 1. 

[clownpixie]

Box 1: 4993. Box 5: 9433. Books etc 527.

[Hal_Al]

This assumes the scholarship  is NOT restricted:

You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Enter the 1098-T, exactly as received, on the student's return. When asked how much of the scholarship was used for room & board, enter $7913*.  Enter the book expense. You should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return (line 1 of form 1040 with notation SCH7913)

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s return . The alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T on the student's return or $4000 more in the box 5 amount.

There's yet another (and simplest) work around. Manually calculate the taxable amount ($7913*) of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount ($7913*)  in box 5. Enter no other numbers

*9433-4993-527=$3913 Original taxable scholarship amount

3913 + 4000 = $7913 Taxable amount after claiming AOTC

[Brenda67]

Can we do the same work-around if SOME of the scholarship money was restricted? If so, would you mind giving specific instruction for the following: Box 1 $3896.16; Box 5 $84043.72 with $3000 restricted to tuition and books and another $850 restricted to tuition, books, room & board; other course-related expenses such as laptop & supplies for class $$3,628.25. Room and board is not included in expenses. My Ds income was less than $1,000. Thank you in advance for your help!

[Hal_Al]

I'll assume Box 5 is $8443.72, not $84043.72. Since $3000 is restricted to tuition, that only leaves you $896 (3896 - 3000) of tuition that can be claimed for the tuition credit. 

$896 tuition + 3628 other required expenses = $4524 can be used for the tuition credit.  Use $4000 to claim the American Opportunity credit on your return.  That leaves $524 the student can use. 

Enter the 1098-T, on your return, but only enter $4000 in box 1.  Enter No other numbers. 

The student has $8444 scholarship - $3000 used for tuition - $524 used for books, etc. = $4920  Taxable.

On the student's return, enter the 1098-T with $4920 in box 5. Enter no other numbers. 

Since the dependent's other income is less than $1000, and scholarship is less than $12,400,  technically he does not need to file a tax return. You may want to file anyway to document the reporting of the scholarship as income.

Ignore the $850 restricted scholarship because it was, effectively, used for room & board.

Keep these calculations, in case of an IRS inquiry. 

[Brenda67]

​Thanks so much! That was most helpful! Now I am wondering if we can do sort of the same thing with my son even though he has an income greater than $12,400 ($21,300) by having him pay the taxes on the additional $4000 income at his rate while we claim $4000 in expenses for AOC in order to receive the $2500 tax credit. Additionally, his expenses exceed his scholarship. Is my logic good? Here are the details: Box 1 $6312; other related expenses $2,559 [total $8,871]; Box 5 $8,500 (this is actually adjusted to include his spring 21 scholarship; was $5031; it is not restricted; my logic is that the tuition for spring 21 is included in Box 1 on the 1098-t).

So $8,871 total expenses - $4000 (our return/tuition credit AOC) = $4,871 left that the student can use.

Scholarships of $8,500 - 4871 above remaining expenses = $3,629 taxable amount on son's return. He would enter the $3,629 in box 5 of 1098-T and no other numbers.

Thanks in advance for your help!

[Hal_Al]

@Brenda67  Said "So $8,871 total expenses - $4000 (our return/tuition credit AOC) = $4,871 left that the student can use. Scholarships of $8,500 - 4871 above remaining expenses = $3,629 taxable amount on son's return. He would enter the $3,629 in box 5 of 1098-T and no other numbers".

That's correct.

 You can  claim $4000 in expenses for AOC, on your return.  That assumes the student qualifies to be your dependent.  With $21,300 of income, that might be "iffy". 

There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf