1098 T Scholarships and Grants exceed tuition

[ellzeybell]

I have a son in college and can claim him but was told that he should file as an independent.  His 1098 T Box 1 is 60730 and Box 5 is 86749.

1.  What strategy is there for him to be able to claim the AOCT credit?

2.  Should/can  he file as an independent and is there any benefit for him to do so?

3.  Should he file as a dependent?

4.  What strategy is there for me to claim him and get the AOCT credit?

Does the tax loophole work here to claim up to 4000 of box 5 as income?  Would that mean that he claim 56730 as income?

[KrisD15]

Box 5 is scholarships and Box 1 is tuition.

If tuition paid was 60,000 and the student received over 86,000 in scholarships, there would be no education credit.

If you wanted to claim 4,000 for a credit, the student would need to claim 30,019. 

86,749 - 60,730 = 26,019 + 4,000 = 30,019.

If he did not supply more than half his own support, he cannot file as a non-dependent.

1. As a non-dependent, he can only claim the non-refundable portion of the credit. The non-refundable portion can lower tax liability but the remaining amount is not added to a refund. 

If he is a non-dependent, he could try to claim the credit, but he received more in scholarships than what he paid in expenses. 

2. No one gets to decide if the student is a dependent or not, only the IRS decides that. If the student did not supply more than half their support (and scholarships don't count) they are a dependent. If they did, they are a non-dependent. 

The only thing you can decide is if you want to claim the student (if you supplied more than half their support) or not. If you can claim the student, but decide not to, no one claims the student. The dependent student can still file, but only as a dependent. 

3. Only if the student supplied more than half their own support. Here is an IRS worksheet you can use to figure support.

4. Credits work off claiming expenses reported in Box 1 on the 1098-T, not Box 5.

Education expenses such as Tuition, fees, books and supplies are QUALIFYING EXPENSES and can be used for a credit OR to offset otherwise taxable scholarships. 

Room and Board are NONQUALIFYING EXPENSES which can be used to claim scholarships as income if it frees up expenses for a credit. 

With the numbers you provided, if the student has 30,019 in nonqualifying expenses (or additional qualifying expenses not listed on the 1098-T such as books and supplies) the student could claim that much as income and you could allocate 4,000 towards a credit if you claim him as a dependent. 

Whether the tax the student pays would be less than the credit you would receive depends on your tax situation. 

IRS Pub 970 

"Coordination with Pell grants and other scholarships. You may be able to increase your American opportunity credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student's gross income. Your credit may increase only if the amount of the student's qualified education expenses minus the total amount of scholarships and fellowship grants is less than $4,000. If this situation applies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees"

[Hal_Al]

Q. Does the tax loophole work here to claim up to 4000 of box 5 as income? 

A. Yes.

Q. Would that mean that he claim 56730 as income?

A. No, he would claim $30,019 (86,749 - 60,730 = 26,019 + 4,000 = 30,019) as income, reduced by any additional books and/or computer expense. This is the strategy  for you to claim him and get the AOTC credit?

Q. What strategy is there for him to be able to claim the AOCT credit?

A. For you to not claim him as a dependent. See full explanation below*.  A rough look at the numbers says this strategy doesn't work. It's about $1900 for him vs. $3000 (2500 AOTC + 500 ODC) for you. 

Q.   Should/can  he file as an independent?

A.  No. The best he can do is file as a person who CAN be claimed as a dependent but isn't actually claimed. 

Q. Is there any benefit for him to be able to file independent?

A. No. He would still not be eligible for the refundable portion of the AOTC. The kiddie tax would still apply. Those are based on age and support, not dependency. 

With the tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. However, you only qualify for an education credit or deduction, if you are not a dependent.  But, the question is academic, he isn't allowed to file independent. 

*While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out.  A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  
If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)

[ellzeybell]

Since I have to claim him as a dependent.  Please provide the information for how to enter the information in Turbo Tax for my return as well as his.

1098T Information:

What to enter on his return for Box 1 and Box 5

What to enter on my return for Box 1 and Box 5

Where is the income reported on his return.

And anything else I need to properly enter this solution in Turbo Tax

[AmyC]

1.You will enter the 1098-T as it is. Then you will manipulate the numbers to answer the questions so that the taxable amount is the $30,019 less any other expenses.

2.  You will enter the 1098-T as is and mark the answers to the questions for the program to understand that you paid $4000 of the tuition expenses while scholarships covered the rest. 

3.  The income goes to Sch 1 line 8r. The income used to go on the same line as wages since scholarship income is a hybrid of sorts. It counts as earned income for where it is reported and to determine the filing requirement. It counts as unearned income for purposes of the Kiddie Tax. He will be subject to Form 8615. See What is the Kiddie Tax?  

[Edited 3/28/24 3:31 PM PST]

[Hal_Al]

One final caveat, before you proceed. Be sure you have, at least, $1500 in tax liability, so that you get the full AOTC ($1000 refundable, $1500 non refundable). 

Theoretically, TurboTax (TT) can handle this, by you following the interview. But, it doesn't always do a good job and it's easy to make mistakes.  Since you already know the outcome, it may be best to use  short cuts. 

On your return, enter the 1098-T with $4000 in box 1 and box 5 blank. Enter no other amounts.

On his return, enter the 1098-T with box 1 blank (or 0) and  $30,019 in box 5.  Reduced the $30,019 by any additional books and/or computer expenses.

Q. Where is the income reported on his return?

A. TurboTax will put the taxable scholarship on line 8r of schedule 1 (this is a  new place, starting in 2022). It ends up on line 8 of form 1040, with any other schedule 1 income.