1098T -excess scholarships over qualified expenses. How best to report?

[Cat108]

I'm a parent of a 19-year-old full-time college student. He is:

Enrolled full time student (sophomore).

We provide 100% support.We  are married, filing joint.  Our AGI is in the limit to claim the American Opportunity Credit. We claimed the American Opportunity credit for him last year.

He lives with us 12 months of the year.

He received a 1099-nec for $750. No taxes deducted

He received a 1098 T that indicated that he got more scholarships than qualified educational expenses: Box 1 = $14,147  Box 5: $28,962. Scholarships are only used for tuition and cannot be used for room and board.

We paid out of pocket qualified educational expenses of $1,013 (books,computer,etc).

We are uncertain who should report the income, how to minimize tax for both of us and how best to maximize education expenses/ credits (ie. American opportunity tax credit). Can we claim him as a dependent? We would appreciate clarification and how to handle this in turbo tax.

1. Is my son (or the parents)  responsible for reporting the excess scholarships ($28,962- $14,147=$14,815) ? Who would report the $750 stipend? To report the excess scholarships, would they simply enter the 1098 T information on their return?
2. Can the (parents) claim the out of pocket expenses ($1,013) and claim a portion of the American opportunity credit? 
3. We provide 100% support to our son. Can we still claim him as dependent,even if he reports the income? 
4. On Form 8615, there is a question..” if the parent elects to report income on their return”.. Would we need to check this box or not? What is the  result if this box is checked?

Thanks for your help!

[MichaelG81]

1. If you plan on claiming him as your qualifying child which can be done based on given facts, you would need to enter the 1098T on your return. If your son is going to do his own taxes, he can claim the 1098t on his taxes. remember he still gets the standard deduction of 12,950. The additional scholarship money will turn taxable in excess of tuition. Scholarship money is not used in calculation of own support.
2. If it is a qualifying educational expense(s) needed for the child's education courses and you plan on claiming him yes, if not he can claim the educational expenses with the 1098T on his return. The only way for you to claim the expenses is if you claim him and enter his 1098T on your tax return.
3. Yes, you can still claim him if he is 19, full time student, living at home all year or away for school, and you provide more than half of their support; you can claim him until the year he turn 24 and is still a full time student. But it may be more beneficial in this scenario for him to do his own taxes, because of the taxable scholarship money and his standard deduction of 12,950 will wipe most of it, and the credit worth up to 2,500 will help him if he files and follows the instructions below. He will also need to say he can be claimed by another but they will not be claiming him in Personal section interview.
4. For Form 8615 below is an image I do not see check box "if the parent elects to report income on their return". Here are the Instructions for Form 8615

Fact Sheet: Interaction of Pell Grants/Scholarships and Tax Credits: Students May Be Foregoing Tax B...

https://www.irs.gov/pub/irs-utl/Pell%20AOTC%204%20pager.pdf

Doble check, you entered Box 1 and Box 5 correctly.

If Box 5 is greater than Box 1 or equal to read the article below.

Your son or you would have to claim that the Pell Grant/Scholarship, were used to pay for Room and Board in the education expense section (if this is the case), or other eligible equipment and computer, or books purchase necessary for the training program.  After entering your 1098-T which most taxpayers need a place to live and have living expenses as outlined in the article below, or other qualifying educational expenses, for example, a computer or supplies and books. Even though it may say room and board isn't qualified that is why it turns taxable income, but gives you the credit from the AOTC American Opportunity Tax Credit or LLC Lifetime Learning Credit, if applicable. Please read the article above linked from irs.gov.

 

Fact Sheet: Interaction of Pell Grants and Tax Credits: Students May Be Foregoing Tax Benefits by Mi....

Only enter the amount of income indicated after entering your room and board expenses. It'll say this is taxable income in the amount of xxxx.xx.  In your scenario $3,000 would have to be filed as Other income =Personal Income>Misc Income, 1099-a, 1099-C>Other Reportable Income>Select Yes>Description is scholarship or grant> amount is up to 3,000 in the example case. 

 @Cat108

[Hal_Al]

Q.1. Is my son (or the parents)  responsible for reporting the excess scholarships ($28,962- $14,147=$14,815)?

A.1. Your son.

Q.2. Who would report the $750 stipend?

A. 2 Your son.

Q.3. To report the excess scholarships, would they simply enter the 1098 T information on their return?

A. 3.  Yes, usually.

Q. 4. Can the (parents) claim the out of pocket expenses ($1,013) and claim a portion of the American opportunity credit? 

A. 4. Yes, since he is your dependent. 

Q. 5. Can we still claim him as dependent, even if he reports the income? 

A. 5. Yes.  A "qualifying child" dependent's income is irrelevant.

Q.6. On Form 8615, there is a question..” if the parent elects to report income on their return”.. Would we need to check this box or not? 

A.6.  No.  That option is not available in your situation. If his only income is from interest and dividends, or capital gains distributions shown on a 1099-DIV, there is a provision for entering it on your return, using form 8814, instead of form 8615 on his return. 

Q.7. He received a 1098-T that indicated that he got more scholarships than qualified educational expenses: Box 1 = $14,147  Box 5: $28,962. Scholarships are only used for tuition and cannot be used for room and board.

A. 7. That doesn't make sense unless box 5 also includes scholarship for the first term of the following year. In that case he shouldn't be paying tax on it.  It's not uncommon for schools to mismatch the tuition and scholarship years on the 1098-T.

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. 

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 2022 expenses".

[Cat108]

Thank you for everyone’s advice.

I reported the excess scholarships/stipend on my son’s return.

After checking, it appears that the scholarship did pay for a portion of room and board.  

 My son’s tax return: Turbo Tax is reporting the excess scholarships and the stipend  on line 8 - “Other income from Schedule 1, line 10”.   Form 8615 is filled out and his  taxable income  (after standard deduction) is  taxed at the parent’s tax rate (kiddie tax?) . Does that sound correct?

I’m still stuck on how to best claim  the $1,013  out of pocket qualified expenses. 

On the parent’s return we are claiming him as dependent. 

How do we (parents) claim the out of pocket expenses of $1,013  in the attempt to get the American Opportunity credit (if possible)  in turbo tax?

I entered the out of pocket educational expenses in Other Education Expenses.

I didn't enter my son’s 1098 T information. However,  on another screen, Turbo tax asks for the scholarships that my son received ; “ Did xx receive a scholarship or grant in 2022? After I enter the net taxable scholarships ( 14815) in  turbo tax ,  Turbo Tax indicates that we “ can’t claim an education tax break” (ie. American opportunity tax credit ) because the scholarships exceed the education expenses.  

I've also tried by entering my son's 1098T  information and the out of pocket educational expenses. Same results.

What am I doing wrong ?

If I claim the out of pocket qualified expenses on my son’s return he gets a small reduction in taxes owing.

Thanks for your help .

[Hal_Al]

Q. I’m still stuck on how to best claim  the $1,013  out of pocket qualified expenses. What am I doing wrong ?

A.  Your situation is complex and TurboTax is "struggling" to get it right.

You need to use a workaround. When you enter the 1098-T, on your return, enter $1013 in box 1*. Enter no other numbers. The 1098-T that you enter in TT is not sent to the IRS. The numbers are just used for the calculations. 

Q.  My son’s tax return: Turbo Tax is reporting the excess scholarships and the stipend  on line 8 - 'Other income from Schedule 1, line 10'.   Does that sound correct?

A. Yes. But, verify that it's on line 8r of Schedule 1. It makes a big difference if it's on line 8z.  If 8r, that is correct. 

Yes, some of that will be subject to the kiddie (most will be covered by his standard deduction).

Q. I didn't enter my son’s 1098 T information. However,  on another screen, Turbo tax asks for the scholarships that my son received ; “ Did xx receive a scholarship or grant in 2022? After I enter the net taxable scholarships ( 14815) in  turbo tax ,  Turbo Tax indicates that we “ can’t claim an education tax break” (ie. American opportunity tax credit ) because the scholarships exceed the education expenses.

A. That only means the student can't claim a tuition credit, on his return. You can still claim it on your return, by entering the out of pocket expenses. 

I'm not sure where you're getting $14,815.  I get $15,565;  $29,712 (28962 + 750) scholarship minus 14,147 expenses.  Don't subtract the $1013 you are claiming on your return. 

[Moonfamily3]

Thank you so much for your helpful workaround solutions in Turbo Tax.

My son's return:

I verified that the excess scholarships ($28,962 -$14,147=$14,815) is on line 8r.

However the summer stipend of $750 - (1099-nec) is reported on line 8z- Other Income. Did I enter the stipend correctly?

On my return :

1.) I entered the $1013 out of pocket expenses as you recommended in box 1 of the 1098T .

There is another screen on Turbo Tax which asks " Did xx pay for books or materials to attend school?.. Enter books and materials required to be purchased from the school. Could I enter the $1,013 out of pocket expenses here instead of 1098T and still give the same results?

2.) On another screen Turbo Tax asks for the scholarships that my son received;" Did xx receive a scholarship or grant in 2022? If so, how much?

Should I leave this blank since my son will report the excess scholarships of ($28,962 (box5) -$14,147 (box 1)=$14,815*) on his return? If I leave this blank, then I get an American Opportunity Credit equivalent to the out of pocket expenses ($1,013) that I reported on box 1 1098 T.

If I enter the excess scholarships amount of $14,815* , Turbo Tax says I do not qualify for any education deduction (ie American Opportunity Credit.) I do not get any credit for the out of $1,013 pocket expenses/American opportunity credit. I just want to know what is the correct thing to do.

Thanks for all your help and patience.

[Hal_Al]

 But it also sounds like you you may want to  work on increasing the  $ 1013 American Opportunity Credit.

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 $10,000 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.

[Hal_Al]

Q. My son's return :I verified that the excess scholarships ($28,962 -$14,147=$14,815) is on line 8r.

However the summer stipend of $750 - (1099-nec) is reported on line 8z- Other Income. Did I enter the stipend correctly?

A. No.  But, in his case it doesn't matter, as the tax comes out the same.  He already had enough taxable scholarship (earned income) to get the full $12,950 standard deduction. 

Q.  Enter books and materials required to be purchased from the school. Could I enter the $1,013 out of pocket expenses here instead of 1098T and still give the same results?

A. Yes, but you would still have needed to modify the 1098-T. Otherwise, TT would apply the excess scholarship to books, not giving you the credit. 

Q. Turbo Tax asks for the scholarships that my son received;" Did xx receive a scholarship or grant in 2022? If so, how much? Should I leave this blank since my son will report the excess scholarships on his return?

A. You answer that question, no.   When you elect to enter a modified/adjusted 1098-T, you don't enter any additional numbers. Your adjustment of the 1098-T gives TT only the numbers it needs to calculate the desired result; in your case, use $1013 to calculate the AOTC. The AOTC is 100% of the first $2000 of qualified expenses and 15% of the next $2000.