1098 T

[diamondlil213]

I have a question about education expenses and the American Opportunity Tax Credit. My daughter received a scholarship from her school as well as a private scholarship. The private scholarship could be used for any school related expenses (room, board, etc) and was sent directly to her college.  

The 1098-T form shows $40,515 in box 1 and $51,460 in box 5. It appears she has a surplus, but this doesn't take into account that her private scholarship was used to pay for room and board (which was about $11800 and it is a 15K scholarship), leaving us with a $862 tuition payment. Is there anyway to allocate these funds to reflect they were used to pay for room and board, so we can claim the $862 as a tuition expense? Thanks! 

[Hal_Al]

Q. Is there anyway to allocate these funds to reflect they were used to pay for room and board, so we can claim the $862 as a tuition expense? 

A. Yes. You can claim the maximum $4000 as tuition expenses for the tuition credit. 

There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. 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 conditions of the grant are that it be used to pay for qualified expenses.

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.

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 $5000 of taxable scholarship income, instead of $6000.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.

[diamondlil213]

So, if my daughter's scholarship is $15,000, she can file her own taxes and would report $11,000  as income and we could take the $4,000 tuition credit? If so, do we still report the 1098 T? 

[Hal_Al]

Q. So, if my daughter's scholarship is $15,000, she can file her own taxes and would report $11,000  as income and we could take the $4,000 tuition credit?

A. Yes, that's fundamentally the answer. But your numbers may not be right.*

Q. If so, do we still report the 1098-T? 

A. Yes, you must report that she got a 1098-T to qualify for the credit.

*It's not clear if the $15,000 private scholarship is included in the 51,460 shown in box 5 of the 1098-T. Is so, your numbers are 51,460 - 40,515 = $10,945 of her scholarship is already taxable.  If you claim $4000 for the AOTC, her taxable amount becomes $14,945.

If the $15K, is not included in box 5, why not? What is the source of the money? Gift money is not a  scholarship and does not need to be accounted for (depending on the source).

[diamondlil213]

Thanks for your response. Here is a breakdown that might help (I'm still a bit lost)

Total cost of attendance:$52,322

Scholarships/grants from school: $ 36460

Private scholarship: $15000 (this is included in box 5 of 1098-T)

Remaining balance we paid out of pocket: $862

Room and Board was around $11800 and can be paid with private scholarship, all other expenses are qualified expenses. I included this expense in total cost of attendance

With these numbers are you able to tell me how much my daughter needs to claim? She is 20 and we claim her as a dependent. Thanks!

[Hal_Al]

$52,322 - 11,800 = $40,522.  That's not much different than the $40, 515 in box 1 of the 1098-T.

So, the answer is the same: 51,460 - 40,515 = $10,945 of her scholarship is already taxable.  If you claim $4000 for the AOTC, her taxable amount becomes $14,945.

Theoretically, you enter the 1098-T on both  your return and her return and carefully follow the interviews and TurboTax will come up with those results.  But, it tends to get messy.  Since we've already done the math, the short cut is enter the 1098-T, on your return with $4000 in box 1 and box 5 blank.  On her return enter the 1098-T with box 1 blank and $14,945 in box 5. Enter no other numbers. 

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.

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. 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.

[diamondlil213]

Thanks again. So if her income is now considered $14945 and she also has $3890 in income for another job, she will have to pay taxes on $18,835 at 12%, so $2260? Meaning, it kind of cancels out AOTC? 

[Hal_Al]

Q. She will have to pay taxes on $18,835 at 12%, so $2260? Meaning, it kind of cancels out AOTC? 

A.  The AOTC is $2500 for you.  You don't compare that to the tax on $18,835 ($2260).  You compare it to the tax on the ADDITIONAL $4000 of income, for her ($480).  

[diamondlil213]

I was trying to file my daughter's taxes free on FreeTax USA (we used turbo tax) but it won't allow me to enter info for her 1098-T claiming she is a dependent and not eligible (but I could report her $14945 scholarship as income). Does this income need to be reported on a 1098-T though (I was able to do it on a service that was going to charge me). 

[Hal_Al]

Q.  Does scholarship income need to be reported on a 1098-T?

A. No. But, using a 1098-T, with adjustments, is the best way to enter it in a tax software program, like TurboTax and others, to insure it goes to line 8r on Schedule 1, where it gets special treatment*.  It appears that maybe FreeTax USA isn't programmed to handle it. or you just entered something wrong. 

In TurboTax, you don't so much need a 1098-T, but you do need to enter the scholarship income in the Deductions and credits / educational expenses and scholarships section, rather than the income section. 

*   Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

Taxable scholarship goes on line 8r of Schedule 1.