1098-T (yet another one)

[ProffieJoe]

Ok, so on my son's 1098-T

Box 1:  10,500 (qualified expenses)

Box 5: 13,000 (scholarships)

None of the money from box 5 was refunded.  The overage (since the scholarship received can be applied to anything per the scholarship rules) was simply applied to his on campus dorm bill.  Basically, son received a 6500/semester scholarship that can be used for anything, tuition and fees/semester 5250, dorm housing 5500/semester, so the excess scholarship helped pay dorm expense.  Does any of this have to be declared on 1040 (excess income, since he will not apply for hope credit or AOC).  He has other income so he will be filing a 1040.  Thank you.

[AmyC]

Yes, but how much is up to you based on IRS limitations. Box 5 - box 1 = taxable income is the lowest income, no scholarship route but usually not the best route. There is enough money for somebody to get an education credit.

You can say box 5 $13,000 covered $6500 in tuition and the rest went to dorms. That allows $4,000 for AOTC with an income of $13000-6500 = $6500 taxable income. The small increase in taxable income should be vastly outweighed by the large credit.

The credit and income limits:

• For the full credit, your MAGI (modified adjusted gross income) is less than $80,000 ($160,000 if you're filing jointly)
• For a reduced credit, your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you're filing jointly)
• There is no credit given if your MAGI is above $90,000 ($180,000 if you’re filing jointly)

[Hal_Al]

Q. Does any of this have to be declared on 1040 (excess income)?

A. Yes.  Scholarships that pay for qualified educational expenses (QEE - tuition, fees, books and other course materials) is tax free.  Scholarship amounts that exceed QEE is taxable income, on the student’s tax return.  Room and board are not QEE, so money applied to "dorm bill" is taxable. 

If box 5 of the 1098-T exceeds box 1, TurboTax (TT) will treat the difference as taxable income, unless you enter additional QEE at books and other expenses.  The fact that None of the money from box 5 was refunded, does not make it non taxable.

Furthermore, 

 There is a tax “loop hole” available. 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 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 an example: Student has $10,500 in box 5 of the 1098-T and 13,000 in box 1. At first glance he/she has $2500 of taxable income and nobody can claim the American opportunity credit. But if she reports $6500 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 $5500 of taxable scholarship income, instead of $6500.

[ProffieJoe]

Thanks-

I guess I am still a bit confused how to actually fill this out in TT since I am asked about the boxes on the 1098-T, and I am told (by the software) I (well, my son, since I am not claiming him as a dependent) that he is not eligible for the credit, probably because that Box 5>Box1.

Thanks again - I appreciate the assistance.  

[Hal_Al]

You have to use a workaround in TurboTax to "fill this out".  For more specific help,  additional info is needed.

Why is you son not being claimed as a dependent?

How much other income does the student have?

Is the student an undergrad? 

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. He 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)

[MK151]

Does that mean that the amount in box 5 can be split however is convenient between the parents and student tax returns when reporting 1098 T and if so, since the parents will use the whole amount in box 1 to claim the educational credit, does that mean that on the student return for 1098T when the split part of box 5 is reported to be added to the unearned income, for box 1 is entered 0 or left empty?

Thank you!

[Hal_Al]

@MK151 

Q. Does that mean that the amount in box 5 can be split however is convenient between the parents and student tax returns when reporting 1098 T?

A. No. it means the box 1 amount (the qualified expenses) can be split any way you want, for the best tax result.

Q. Do the parents  use the whole amount in box 1 to claim the educational credit?

A. Usually no.  If box 1 is less than $4000, then yes.  $4000 is the maximum amount of qualified expenses needed for the maximum amount of American Opportunity Credit

Q. If the parents use all the box 1 amount on their return, does the student enter 0 in box 1 of the 1098-T, or leave it blank.

A. Yes. That is the easy way to do it. But, it's actually a workaround. 

[MK151]

I am still trying to figure out how to work around our numbers and any advice will be very helpful!

Box 1 is $2750 and box 5 is $16150. Nothing else on the form. My student also has about $3500 earned income from a par time job if that matters at all.

Thank you!

[Hal_Al]

On your return, you enter the 1098-T with $2750 in box 1 and box 5 blank. That will get you $2187 of the maximum $2500 credit. If you have some book and computer expenses, you can add that to the $2750 to qualify for a little more credit (the additional credit is 25% of the additional expenses) 

On the student's return, he enters the 1098-T with box 1 blank and $16150 in box 5.  He will be allowed the maximum $13,850 standard deduction*, so his taxable income will be 16,150 + 3500 - 13,850 = $5900.  The kiddie tax will apply, so that amount will be taxed at the parent's marginal tax rate on form 8615. 

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  

[MK151]

Thank you, now I understand it better! I got confused because I thought that the entry from 1098 T has to match exactly how it issues in one piece since it is sent to irs,(like 1099, w2 etc) . I didn't know I can put some on our return and some on the student's. I assume it doesn't matter how much he used for room/board($9000) which he'll put in the question asked into 1098 section anyways, also the rest was direct deposited back to him, which I don't know if it changes anything. He was already getting $5 back from the tax withheld from his part time job, so I assume he'll just pay tax on the extra amount of the scholarship above the standard deduction.

[Hal_Al]

Q.  I assume it doesn't matter how much he used for room/board($9000)?

A. Correct. R&B are not qualified expenses for scholarships to be tax free.

If you use the workaround of entering 0 in box 1, on his return, you do not have to answer the question about how much  scholarship was used for room &board

Q.  He was already getting $5 back from the tax withheld from his part time job, so I assume he'll just pay tax on the extra amount of the scholarship above the standard deduction?

A.  Yes, essentially. 

Q.  The rest was direct deposited back to him. Does that change anything?

A. No. 

Q.   I thought that the entry from 1098 -T has to match exactly how it issues in one piece since it is sent to irs,(like 1099, w2 etc) 

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.

But, you claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2023 expenses".

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

[MK151]

Thank you again, I really appreciate the assistance and advice. It is all very clear and easy to understand now. With more than one semester, box 1 will be above 4000 and then I assume parents declare 4000 in box 1 and 0 in box 5, and  the rest of box 1 is left for the student to put on his return along with the whole scholarship amount from box 5.

[Hal_Al]

Q.  With more than one semester, box 1 will be above 4000 and then I assume parents declare 4000 in box 1 and 0 in box 5, and  the rest of box 1 is left for the student to put on his return along with the whole scholarship amount from box 5.

A. Yes

[ProffieJoe]

Sorry for the late response.

I am not claiming my student as a dependent for a couple of reasons:

1.  It will not help for education credit since our MAGI is >180,000

2.  He worked in a state with no income tax for the summer, yet has to pay NYS taxes on that income.  His liability will be greatly reduced if I do not claim him.

So, should I still be able to do the workaround?  I can play with numbers to see how much of the Box 1 I can claim as tuition/expenses and see if I can get things to look better for him (if it is allowed).

I also have a son in Grad school whose tuition and scholarship money (Box 1 and Box 5) are nearly the same.  Can I do the same thing for him (determine how much of Box 1 can be used for tuition and the rest income).  It may lower his tax liability if it works!

Thanks again!!

[Hal_Al]

@ProffieJoe 

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, he only qualify for an education credit, if he is not a dependent.

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).

Q. So, should I still be able to do the workaround?

A. Yes, the student can do it, if the parent is not claiming the tuition credit. 

Q. I also have a son in Grad school whose tuition and scholarship money (Box 1 and Box 5) are nearly the same.  Can I do the same thing for him (determine how much of Box 1 can be used for tuition and the rest income). 

A. Yes. Grad students are not eligible for the AOTC, but can get the very less generous Lifetime Learning Credit (LLC).  The LLC  is 20% of tuition paid, up to $10K. Books and a computer are not eligible expenses. The LLC is 100% non refundable.