1098-T Problem with Grants

[agianna]

I'm an undergraduate student, age 21, living with parents. My question is about the 1098-T. I get a lot of financial aid, which covers all my tuition and then I get paid what's left. The way it works is, the money goes straight to pay the tuition and then I get the rest directly in my bank account. For 2019, my grant was $5969. The money paid the tuition and fees directly and then I got a refund of $2021.

I'm confused because it seems like my 1098-T has different numbers. Box 1 (payments received for qualified tuition and related expenses) says $3693, while Box 5 (scholarships or grants) says $5969. For one thing, I don't know where it's getting the Box 1 number, because I didn't directly pay for the tuition, it came out of my financial aid.

Then, when I enter the $5969 on Turbo Tax, it takes out a good chunk of my refund. My question is, since much of the grant went straight to tuition payments, shouldn't that not count as taxable income? Should I report $2021 for scholarships and grants?

I would appreciate any input. Don't want to get a smaller refund but also don't want to get in trouble with IRS 🙂

[Hal_Al]

Simple answer: Yes, you report the $2021 as taxable income. The simple way to do that is: at the 1098-T screen, in TurboTax enter $2021 in box 5 and 0 in box 1 (the 1098-T is only an informational document; the actual numbers on it are not required to be entered onto your tax return).  If you paid for books or other required course materials, with any of the $2021, reduce the amount you enter, in box 5,  by the amount you paid.

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But,  there is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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 your numbers: Student has $5969 in box 5 of the 1098-T and $3693 in box 1. At first glance he/she has $2276 (or $2021) of taxable income and nobody can claim the American opportunity credit. But if he reports $5969 as income on hi return, the parents can claim $3693 of qualified expenses on their return.  This will get them somewhere between $969 and $2423 depending on their tax liability; which is a lot more than the little extra tax you will pay. 

[AmyC · Accepted solution]

The biggest refund might be to claim more income. This is a long answer and a long process. My daughter had the same refund issue, the numbers don't quite match. Here is why.

• The tuition number is what was paid to the college for you.
• The scholarships could have gone to you and then you gave it to the school. It doesn't matter.
• Then there were some other expenses for school that the college took out and then gave you the rest, $2021. Those other expenses could have been fees, tickets, anything.

The reality is your 1098T. That extra money was income to you, you just did not get it in your hands but it did go to pay your bills.

There are two ways to handle this income. Yes, I know this sounds backwards for method 2.

Method 1:  Only claim the difference between box 1 and box 5 as income.

Method 2: Claim more of box 5 as income, up to the full amount and claim the tuition part to get the education credits.

Depending on your other income, method 2 is probably going to give you the best bang for your buck. The education credit can be thousands of dollars refund versus a tax liability of a few hundred dollars at most. The only hard part is figuring how much to claim for education and  how much to put into income.

I would start with making all of box 5 as income. Then check that it was used for other expenses (rent, food, etc come into play here). The program will ask if you used your scholarship for room and board, mark yes.

Then state that you paid the tuition and claim the education credits.

This is absolutely legal and the IRS recommends moving the money to your best benefit.

Here are some related links:

Here are some links:

Form 8863

Qualified Expenses

Qualified College

Available Education Credits

IRS Q & A about education credits

Tax Benefits for Education: Information Center

About Form 8863, Education Credits

[agianna]

Thanks so much for the detailed information. I think I will try method two. 

[agianna]

Thanks for the info!