1098T Loophole

[benbuluga]

This spring I was a senior in college with my final semester paying ~$2,500 for tuition (1098T box 1) and receiving ~$12,000 in scholarships (1098T box 5). During the year I made ~$45,000 in income from a job. Based on my research, I believe I should be able to claim the entire scholarship as taxable income to take advantage of the education credit. However, the tax software I am using does not seem to work with this. I have put $9,500 as "Other income".

The software poses these questions and bolded are my answers:

You told us that you had $9,500 in Pell Grants and scholarships that weren't used to pay for tuition, books, or other qualified education expenses. Do NOT include this amount below.
Do you want to allocate part of [Name]'s Pell Grants or scholarships to room and board or other noneducational expenses such as travel, research, or certain equipment? Yes.

How much of the $12,000 [Name] received in Pell Grants and scholarships do you want to allocate to room and board or other noneducational expenses? $2,500

I believe I am inputting this correctly, but the software is giving me $0 for the education credit. Is this a software problem or am I doing something incorrect?



On an unrelated note, I have found out that I have not been claiming the scholarship as taxable income for the past 3.5 years. My father had been doing my taxes and was not aware that non-tuition scholarship money must be claimed as taxable. What is the best way to go about remedying this? My tax returns have been accepted each year just fine.

[Hal_Al]

To use the "loop hole", do not enter $9500 as the scholarship amount.  Enter the 1098-T, exactly as received. When asked  if you want to allocate part of  scholarships to room and board or other noneducational expenses, enter the full $12,000. That frees up the $2500 for the Tuition credit.

Be  aware, if 2025 was your fifth calendar year in school, your parents may have already claimed the more generous American Opportunity Credit (AOC) the maximum four times allowed.  In that case, you will only be eligible for the Lifetime Learning Credit (LLC).  You get only  $500, instead of $2125 for the AOC.

Q. I have found out that I have not been claiming the scholarship as taxable income for the past 3.5 years. What is the best way to go about remedying this? 

A. You should probably file amended returns for the past three years and also for 2021, if tax is owed.

That said, be aware that Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $15,750 filing requirement (2025)* and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  If you did not have enough income to be required to file or enough to owe taxes, you can probably forget about it. 

*$12,550 (2021), $12,950 (2022), $13,850 (2023), and $14,600 (2024). 

Q. My tax returns have been accepted each year just fine?

A. Taxable scholarship is not currently an topic of IRS monitoring. 

[KrisD15]

It sounds like you are trying to use all tuition expense (2,500) for an education credit.  In that case you would need to claim all the 12,000 scholarship, not just 9,5000 and you do not enter that as "other income" in the Income section in TurboTax, it is all done in the Education Section. 

To enter in TurboTax, first enter your income statements, such as your W-2 in the income section.

Switch to 

• Deductions & Credits 
• Education
• Expenses and Scholarships (Form 1098-T)

(you may need to select EDIT if you previously enter the 1098-T)

Go through the interview, in your case entering 2,500 in Box 1 and 12,000 in Box 5. 

On the "Did You have any of these situations for the scholarship or grant?" screen select "You used it to pay room and board" and the amount. Since you want to use all the 2,500 in Box 1 for the credit, you would enter the full amount of the scholarship, in your case 12,000 here. In other words, you are claiming ALL the scholarship as income so that the full amount of tuition goes towards a credit. 

The program will move the 12,000 scholarship to Schedule 1 line 8r and that will flow to your 1040 line 8 as income. 

Now the remaining expenses, in your case the full 2,500 tuition, will be listed on Form 8863 and an education credit (if any) will be calculated. 

On your unrelated note, if you had scholarship income in the past and that scholarship was taxable income because it was not used to pay education expenses such as tuition, fees, books and supplies, you would need to amend your prior returns depending on the amount

The tax would be a liability to the student, not the parent. 

The scholarship amount would need to result in the student having an income high enough that the student would need to file.