1098T loophole for dependent

[Madamecoco]

We will be claiming our 19-year-old son as a dependent on our tax return. He has a 1098T with $4,947 in box 1 and $10,249 as scholarships in box 5. In order to maximize our AOTC on OUR return, I'm assuming he needs to claim some of the amount in box 5 as income on his own tax return.  Since we already meet the $4,000 expense threshold in box 1, I'm assuming we don't want to choose the "allocate" option that I've read about in these conversations, since we already meet it with box 1.  Since his scholarships exceeded his qualified expenses, should he claim the difference between $10,249 and $4,000 (the threshold for AOTC) as income?  Or the difference between box 1 ($4,947) and box 5 as income? Or the whole amount of his scholarship? Or some other scenario? Obviously I'm wondering how best to reduce the "overpayment" in box 5 so that we can qualify for the AOTC. Thanks!

[Madamecoco]

I should add that after I posted this question, a similar question was shown to me. In that question, the advice was given:

There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all her scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on her return. That way, the parents  (or herself, if she 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.  **My note: here, you advised for the student to deduct UP TO the amount needed to claim AOC.**

In the same answer, you said, "Student has $10,802 in box 5 of the 1098-T and $2859 in box 1. At first glance she has $7943 of taxable income and nobody can claim the American opportunity credit. But if she reports all  $10802 as income on her return, the parents can claim $2859 of qualified expenses on their return.  **My note: here, you said for the student to report ALL of the scholarship, not just the amount UP TO the amount needed to claim AOC. Can you please explain why?

[Hal_Al]

Q.  Here, you said for the student to report ALL of the scholarship, not just the amount UP TO the amount needed to claim AOC. Can you please explain why?

A. Because all of the student's tuition ($2859) was less than the maximum amount ($4000) allowed  to claim the  AOC. 

I edited my standard answer, at that post, for the poster's details.  Here's how the generic post goes:

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.

[KrisD15]

Not Quite.

As you say, if you want 4,000 for a credit, and the tuition expense totaled 4,947, 

the student would only be left with 947 that they paid out of the scholarship. 

Since they received 10,249 and paid 947, they walked away with 9,302.

The student would need to claim 9,302 as income for you to get 4,000 to use for a credit.

If the amount in Box 1 is 4,947 as you say, and the amount in Box 5 is 10,249, that would mean that the student received 10,249. You are saying that you paid 4,000 so that you can take the full American Opportunity Tax Credit, and that leave only 947 that the student can say they paid with the scholarship. 

Of course there might also be expenses for books and supplies.

The student in this example claims 9,302. If there is any tax due on the student's return would depend on the student's other income. If this is the only income for the student to claim, there would be no tax liability and the student needn't file.  

In the second example you show, the tuition expense (Box 1) is 2,859. The scholarship was 10,802. If the student took the 10,802 and paid the tuition amount of 2,859, they would walk away with 7,943.

If someone want to use the tuition for a credit, since that tuition was only 2,859, that is the most a person could use for a credit, 2,859, so that person claims the 2,859 towards a credit.

If all the tuition (2,859) goes towards a credit, the student did not pay any of it, so the student claims the entire 10,802 as income.

[Madamecoco]

Thank you so much for the quick, concise, and understandable answer! SO, all we as the parents need to do is claim $4,000 education expenses? We don't have to put anything else from the 1098T into our tax return? We just say we had 4000 in educational expenses and then our son claims the scholarship as you described?

Quick question about that, though. If we are saying we paid 4000 of it, why doesn't he take the 4000 off of what he's claiming as income from the scholarship?

[Madamecoco]

Thanks!

[Madamecoco]

Appreciate the help!

[Madamecoco]

About putting "anything else" from 1009T into Turbo Tax, it does ask for box 5. So do I just leave that blank since he's reporting it as income?

[Hal_Al · Accepted solution]

Q, Why doesn't he take the 4000 off of what he's claiming as income from the scholarship?

A. Because you used  $4000 of the box 1 amount for the AOTC. That amount is no longer tax free.

Q.  Since his scholarships exceeded his qualified expenses, should he claim the difference between $10,249 and $4,000 (the threshold for AOTC) as income?  Or the difference between box 1 ($4,947) and box 5 as income? Or the whole amount of his scholarship? Or some other scenario?

A. Some other scenario. 

Student has a 1098T with $4,947 in box 1 and $10,249 as scholarships in box 5.  At first glance he has $5302 of taxable income and nobody can claim the American opportunity credit. But if he reports $9302 as income on his return, the parents can claim $4000 of qualified expenses on their return. He can allocate $947 (4947-4000=947) of the tuition to the scholarship, keeping that much tax free (plus any books or a computer).

Q. About putting "anything else" from 1098-T into Turbo Tax, it does ask for box 5. So do I just leave that blank since he's reporting it as income?

A.  Yes

TurboTax can theoretically handle all that when you follow the interview carefully. But, it goes smoother if you use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T that you enter in TT is not sent to the IRS.

Enter the 1098-T, exactly as received, on the student's return. Enter book and computer expenses separately.  In his interview, you should eventually reach a screen called "Amount used to calculate education credit" (or similar wording).  Be sure the amount in that box is $4000. You must complete the “education information” subsection to get that screen, That will put all his excess scholarship as income on his return (line 8r of Schedule 1).

Be advised some people are saying they're not getting the "Amount used to claim the tuition credit" (or “Education Expenses used for a Tax Credit”) screen on the dependent’s interview.  Check the student information work sheet (part VI, line 17) to verify it was entered.  If not, the alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T.

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount  in box 5. In that case the amount in the  "Amount used to claim the tuition  credit" box is 0 (if it comes up).

[Madamecoco]

Fantastic response! Thank you so much...what a great service!

[Madamecoco]

Okay, not to be complicated, BUT, the "scholarship" amount in box 5 was not scholarships. It was payments paid directly to the college from a governmental agency for the blind. I just got off the phone with my son's college. They directed me to the Exceptions to 1098-T form on the IRS website, which states:

"Exceptions.

You do not have to file Form 1098-T or furnish a statement for:

• Courses for which no academic credit is offered, even if the student is otherwise enrolled in a degree program;

• Nonresident alien students, unless requested by the student;

• Students whose qualified tuition and related expenses are entirely waived or paid entirely with scholarships; and

• Students for whom you do not maintain a separate financial account and whose qualified tuition and related expenses are covered by a formal billing arrangement between an institution and the student’s employer or a governmental entity, such as the Department of Veterans Affairs or the Department of Defense."

So , his payments were covered by a formal billing arrangement between his institution and a governmental entity. So does this mean he does NOT have to report that "scholarship" amount (which were actually just payments from Rehab Services for the Blind to his college) as income?  We as the parents can still claim $4,000 for the AOTC but he wouldn't have to report the extra money as income?

[Madamecoco]

I believe I found the answer online. It appears he does NOT need to claim box 5 as income, since it was through a formal payment arrangement with a government entity. Thank you for your time and great responses!