On both of my dependent's 1098-Ts, Box 5 is more than Box 1. They both used some of this money on room and board. TurboTax is telling me that they will need to file taxes because their scholarship money is taxable. One amount used on room and board is less than $5,000 and the other is roughly $5,500. If I file their form 1098-T on my return, do they still need to file? If not, where do I enter this into TurboTax?
They do not need to file. But, it is NOT because you are filing the 1098-T, on your return. You are not allowed to report their income on your return (you are allowed to claim their tuition for a tax credit*).
They do not need to file, for $5000 +/- of taxable scholarship income, assuming their total income (each) is less than $12,200 and they each have less than $1100 of investment or misc income.
Even though box 5 of the 1098-T exceeds box 1, you may claim a tuition credit, if you designate some of the scholarship for Room & Board. 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.
*She doesn't actually need to file a tax return, since the total is less than $12,200.