1098-T Box 5 Greater than Box 1

[denisemares12]

Hello,

Both of my children have 1098-T's where Box 5 is greater than Box 1. My daughter received about $4,000 back from FAFSA and used about $2,500 for a new laptop and books. My son received about $3,000 back and used about $2,500 also on a new laptop and books. My understanding is that they both have to pay tax on the remaining amounts they have refunded? Do I put the 1098-T forms on my return, since I am claiming them as dependents, or do they put the 1098-T's on their returns?

[KrisD15]

You would only enter the 1098-T in your TurboTax program if you are interested in getting an education credit. 

Education credits are based on education expenses paid out-of-pocket. 

If Box 5 is larger than Box 1, that would indicate an excess of educational aid, and thus taxable income for the student. The excess would only be reported on the students return. This can be done on the student's return under:

Deductions & Credits

Education 

Expenses and Scholarships (Form 1098-T) 

Enter only the excess under "Scholarships/Grants (for all schools)"

HOWEVER be aware that you can allocate MORE scholarship as income to the student(s) to free up expenses that you can then use for an education credit.

The Education Credit for you is often more than the tax for the student. 

To do this, enter the 1098-T in your program and go through ALL the sections of the Education Interview until you get to "Maximize My Tax Break"

The program will suggest the best way to report the expenses/scholarships based on the information it has. 

If you can allocate an additional 4,000 as income to each student, you may get the full American Opportunity Tax Credit.

That credit can be quite valuable. 

Pub 970 has some great examples and is worth reading. 

[Hal_Al]

 There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. 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 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, instead of $6000.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.

[Hal_Al]

Q. Do I put the 1098-T forms on my return, since I am claiming them as dependents, or do they put the 1098-T's on their returns?

A. 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 possibly your student has taxable scholarship income. 

If you claim the tuition credit, you do need to report that you got one. If you are claiming the credit, the 1098-T goes on your return.

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. But the process goes smoother starting with a 1098-T.

If the student is claiming taxable scholarship, again the process goes smoother if he enters the1098-T.  So, it's very possible it's entered both places, with adjustments.  The TT interview theoretically handles all this.  But,  if you find it easier, just change the numbers in boxes 1& 5 to what your records and calculations  show. The 1098-T that you enter in TT is not sent to the IRS.