1098-T for non-degree student

[Silverlock]

Hello,

My child was in high school for all of 2021.  I am claiming her as a dependent on my return.  She took a class at a local university that was not part of any degree or certificate program.  It was a single class so she was not a half-time student at the school.  She received a scholarship from the university that reduced the amount of tuition due.  I paid all of the tuition; she paid none.  I received a 1098-T from the school showing the full (non-discounted) tuition amount in Box 1 - $1740 - and the scholarship amount in Box 5 - $250.

I entered the 1098-T numbers on my return.  TurboTax tells me that I qualify for the Lifetime Learning Credit because the class she took was to gain or improve job skills.  TurboTax gives me a credit of $348, 20% of the entire non-discounted tuition amount, but then tells me that my daughter needs to claim the $250 scholarship amount as income on her return.  

Is TurboTax's advice correct?  If so, that doesn't make sense to me.  Since I paid the tuition, why would I not reduce the total tuition amount by the scholarship (in order to reflect the amount actually paid) or add the scholarship amount to my own income?

Thanks in advance!

[KrisD15]

The program attempts to get the most credit for the Taxpayer claiming the student. 

What the program calculated is acceptable. In your case, if the 250 is claimed as income by the student (you can't claim it) and that is the student's ONLY income, they would be below the filing requirement and therefore not need to file. 

Your return should include Form 8863 explaining what was done with the expenses. 

Keep all records with your tax file. 

[Hal_Al · Accepted solution]

TurboTax (TT) is half right.  What it's doing is recommending that your student  declare the scholarship taxable to free up another $250 for the credit (that's why you're getting $348, instead of $298).  Since the $250 is less than the filing threshold, she technically doesn't even need to file a return.

But, you're not allowed to do that because the scholarship is "restricted" (it must be used for tuition).  I haven't seen TT make this mistake before.  But, the fix is simple: enter the 1098-T with $1490 in box 1 and box 5 blank (you're allowed to do that). 

By the way, you're not eligible  for the Lifetime Learning Credit because the class she took was to gain or improve job skills (she doesn't have a job).  You're eligible because the course is college level, even though the student isn't. 

[Silverlock]

Thank you for the quick and informative replies!

I will take your advice to reduce the tuition by the scholarship on my return and leave the scholarship amount blank.

TurboTax didn't tell me that I qualified for the Lifetime Learning Credit until I answered the question "Let us know if your daughter is taking college level classes to get or improve job skills."  I guess I focused on the 'skills' bit instead of the 'college level' bit. 🙂

[Silverlock]

Thank you for taking the time to answer my question!