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My son who is a 2nd year full time college student received his 1098t form. Box 1 shows 6xxx and box 5 9xxx. He only paid approx 500 dollars out of pocket for books. The rest of the monies went towards on campus dorming. He had gotten maybe 600 in checks. (Actually don’t even know if he needed student loans at this point because we never received an updated breakdown of costs, grants scholarships.) My main question is, how much, if any does he have to claim as taxable income on his own return? Also, I keep reading about a tax loop hole for him claiming his scholarships as income and that way would qualify me for the credit? I was told by a supposed tax professional that he didn’t need to file taxes for the excess money? I’m so confused
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Since your son’s 1098-T shows $6,000 in qualified expenses (Box 1) and $9,000 in scholarships (Box 5), the $3,000 excess ($9,000 - $6,000) is taxable because it was likely used for non-qualified expenses like room and board. This amount should be reported as taxable Income. See IRS Topic 421 and IRS Pub 970.
Click here to use the IRS Tool: Do I include my scholarship, fellowship, or education grant as income on my tax return?
You can also reallocate $4,000 of the scholarships to taxable income, freeing $4,000 of qualified expenses for you to claim the American Opportunity Tax Credit (AOTC). This would increase his taxable amount to $7,000 ($3,000 excess + $4,000 reallocated), but you could claim up to $2,500 in credits by filing Form 8863. TurboTax can help with this when you enter the 1098T,
For more, see TurboTax Guidance on Taxable Scholarships. See TurboTax Help on 1098-T Forms.
So I would claim 7000 as taxable income on his taxes? Under what category? Which would make him owe quite a bit (I would have to pay because he doesn’t work) Then what do I put in for information for his 1098t and college information? They really make earning scholarships not worth it when you have to owe so much back.
Q. So I would claim $7000 as taxable income on his taxes?
A. Yes. That would allow you to claim $4000 of tuition, on your return for the AOTC. The $7000 could be reduce by any book or computer cost he has.
Q. I was told by a supposed tax professional that he didn’t need to file taxes for the excess money?
A. That is also correct. Assuming the $7000 is his only income, it is less than the $14,600 filing requirement. So, he is not required to file a tax return. Even if he does, he will owe no tax. His standard deduction will wipe out the tax*. You may want him to file just to document him reporting the income, allowing you to use the "loop hole" to claim the AOTC.
Taxable scholarship is entered on line 8r of Schedule 1. The simple way to do that in TurboTax, is enter a 1098-T on his return with box1 blank and $7000 in box 5. The 1098-T he enters is not sent to the IRS, so there is no discrepancy. On your return, do something similar. Enter a 1098-T with $4000 in box 1 and box 5 blank.
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”.
*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.
I also did check and he was required to take approx 3xxx out in student loans. Do I claim that anywhere and does that change the scenario? I am usually knowledgeable with common tax issues but this is new for me. I also read that unqualified expenses for scholarships were unearned income and needed to be claimed over 1300. I just don’t want either of us doing something wrong.
When you’re explaining the 4000 and 7000 where are those amounts coming from? He has 6xxx as tuition expenses and 9xxx in scholarships, giving the 3xxx difference. Sorry for all the confusion
Q. When you’re explaining the 4000 and 7000 where are those amounts coming from? He has 6000 as tuition expenses and 9000 in scholarships, giving the 3000 difference.
A. Yes, he starts out with $3000 of taxable income. But to allow you to claim the AOTC, he ups that to $7000. Effectively, he re-allocates $4000 of scholarship money from Tuition to Room & board (or other expenses).
Here's my standard reply (example modified for your numbers):
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 $9,000 in box 5 of the 1098-T and $6000 in box 1. At first glance he/she has $3000 of taxable income and nobody can claim the American opportunity credit. But if she reports $7000 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 $6000 of taxable scholarship income, instead of $7000.
Q. He was required to take approx 3xxx out in student loans. Do I claim that anywhere and does that change the scenario?
A. No. For tax purposes, loans are irrelevant.* Expenses paid with loan money are treated the same as expenses paid out of pocket.
Q. I also read that unqualified expenses for scholarships were unearned income and needed to be claimed over 1300.
A. Not exactly**. See the previous explanation about being "hybrid". Once $14,600 is exceeded, it will be taxed as unearned income. Better stated: it is earned income for the purpose of calculating the dependent's standard deduction (earned income + $450). A dependent with other unearned income would only get a $1300 standard deduction.
*Except the student loan interest deduction.
** It might best be explained by example. Student has wage income of $6000 and $10,000 in taxable scholarship. $16,000 total income minus $14,600 standard deduction = $1400 of taxable income. The $1400 is unearned income and subject to the kiddie tax (taxed at the parent's marginal rate, not the student's 10% first bracket rate).
Ok thank you all for your responses. I think I’m understanding a little better about it. If I have anymore further questions I will reach out
So upon entering all his info it is showing nothing owed for federal but will owe approx 150 in state. It did have me input my (the parents) info for the kiddie tax, which again, nothing owed for federal but will for state (ny). Does that seem correct that he would owe for state? I read he technically didn’t even have to file but should just to show he claimed that as income.
Q. Does that seem correct that he would owe for state?
A. Yes, because of the generous federal standard deduction, that some states don't have (I'm not specifically familiar with NY).
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