So I first added the 1098T and 1099Q information on my child's tax return but since they are a dependent turbo tax said to enter the data on my return. After entering the data on my return, turbo tax said that $XXX needed to be reported as taxable income on the dependent's return. Where on the dependent's tax return should this be entered?
That is correct. If the student qualifies as your dependent and you are claiming them as your dependent, then all education information is entered on the parents' return. The parent (not the student) gets all the education tax breaks.
Since the student qualifies as your dependent, they must select the option for "I can be claimed on someone else's return" when the student completes their return. The student has no choice on this. Now the key word here is 'QUALIFY'. So it does not matter if the parents actually claims the student or not. If the parent "QUALIFIES" to claim the student, then the student *must* select the option to indicate they can be claimed as a dependent on someone else's return. It flat out does not matter if you claim the student or not. You *QUALIFY* to claim the student.
For the student, if they qualify to be claimed as a dependent on someone else's tax return, then the student *automatically* disqualifies for *any* education credits. They don't get a penny. So you the parent claim the student as your dependent, and you the parents will claim all the education stuff on your (the parent's) tax return.
The only exception to that, would be if the total of all scholarships, grants and 529 distributions received during the tax year, exceeded the total of all qualified education expenses paid in that same tax year.
As for the 1099-Q, the beneficiary recipient whose SSN is on that 1099-Q is the one who will report it on their own tax return. Here's how this works.
If the 1099-Q recipient's income with the 1099_Q distribution added to it exceeds $12,300 ($24,600 if filing MFJ) then they are required to report it on their tax return. When they indicate that distribution was used to pay for qualified education expenses of tution, books, and lab fees, *and/or* the unqualified but allowed expenses of room and board *in direct support* of the education, the distribution will not be taxable.
College Education Expenses
Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:
- Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*
- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.
Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.
Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”. The first one indicates a choice. The second one provides no choice.
Now there are two separate determinations to be made here.
- Who claims the student as a dependent.
- Who reports all the education expenses and claims all the education credits.
First, who claims the student as a dependent?
If the student:
Is under the age of 24 on Dec 31 of the tax year and:
Is enrolled in an undergraduate program at an accredited institution and:
Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a full time student) and:
the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)
The parents qualify to claim the student as a dependent on the parent's tax return . Period, End of Story. But one thing I want to point out here. The parents *QUALIFY* to claim the student. The parents are *NOT* required to claim the student as a dependent. But even if they don’t, since they *qualify* to claim the student, then if the student will be filing their own tax return the student is *REQUIRED* to select the option for “I can be claimed on someone else’s return”. To reiterate:
If the student qualifies to be claimed on the parent’s tax return, then the student can not take the self-exemption on their own tax return, no …matter…what.
Who reports all the education expenses and claims all the credits?
If (and only if) the parents qualify to claim the student as a dependent, *and* the parents actually are claiming the student as a dependent, then:
The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:
The parents will claim all educational tax credits that qualify.
If the student will be filing a tax return and:
The parents qualify to claim the student as a dependent, then:
The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option even f the parent's qualify to claim the student as a dependent, and the parents do not claim them.
Here’s when the parents will claim the student as a dependent, but the parents will NOT claim any of the education expenses or report the 1098-T on the parent’s tax return.
.If the amount of scholarships/grants/529 funds exceeds the amount of qualified education expenses, then the student will report the education stuff on the student’s tax return. The parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.) Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.
In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.
If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s investment income exceeds $1,050 or if the student’s earned income when added to the excess scholarships/grants does NOT exceed $12,350 for the 2019 tax year, then the student doesn’t even need to file a tax return, and nothing has to be reported.
If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.
Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $12,350, then the student should file a tax return so as to get those withheld taxes refunded.
First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to and included in the total on line 7 of the 1040.
Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is included in the total on line 7..
Finally, out of pocket money is applied to qualified education expenses
When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.
Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.
the 1099Q needs to go on whomever's social security number is on the form..... as @Carl points out the 1098-T MUST GO on the parent's tax return (assuming the student is a dependent). The only exception to that is when Box 5 exceeds Box 1 - that is taxable income to the student.
Actually, it depends.
- If the amount in box 1 of the 1099-Q is included in box 5 of the 1098-T (which is not unheard of) then the 1099-Q gets reported nowhere on any tax return. But you should confirm beyond a doubt that this is the case. There is a possibility you'll get a nasty gram from the IRS and you need to be able to prove this to the IRS. (Can be done with a printout from the student's online account.)
- If the 1099-Q amount is not included in box 5 of the 1098-T:
-When added to the beneficiary recipient's other taxable income (W-2 income for example) is less than $12,300 (24,600 if married filing joint), then it doesn't have to be reported on any tax return.
- When added to the beneficiary recipient's other income it exceeds $12,300 ($24,600 if married filing joint) then it has to be included on the beneficiary recipient's tax return. If indicated it was used to pay qualified education expenses with, or the unqualified but "allowed" expenses of room and board *IN DIRECT SUPPORT* of the education, it won't be taxable.
The point is, if it's not included in box 5 of the 1098-T and it doesn't get reported to the IRS, chances are it will generate a paper audit-by-mail if the addition of that distribution to the to the the beneficiary recipient's other income would have required them to file a tax return at all.
I've also re-worded my prior response to reflect the correction. Thanks.
The only exception to that is when Box 5 exceeds Box 1 - that is taxable income to the student.
Generally, that's true. But after entering the 1098-T as printed, the program will ask you for both, qualified expenses not included in box 1, as well as any educational assistance received not included in box 5.
So while the 1098-T may have more in box 5 than in box 1, when all is "said and done" it's perfectly possible for qualified education expenses to exceed all education assistance received.
Even the opposite is possible to, where box 1 exceeds box 5. But after entering educational assistance not included in box 5, the sutdent has taxable/reportable scholarship/grant income in the end when all is "said and done".
*Life really is simple. The fact we only live for a short time is what makes it seem complicated.*
@NCperson fixed with an edit already. Oversight on my part. I'm used to seeing the parent at the beneficiary recipient, because that's the way things were set up for me, when my two kids went to college.