1099 Misc and Scholarship

[broncos4ever]

My child received a 1099 Misc form for a $2500 scholarship that could be used for anything by my company.  I reported it to the university and it is included on the 1098 T form.  About $1300 of the scholarship is considered taxble because it exceeded the qualified expenses by that amount.  My child also has a W2 and earned about $1,200 for the year.  How do I handle this without being double taxed for the $1300?  

[AmyC]

Since the scholarship income exceeds the cost of room and board plus tuition and related expenses, it becomes income to your child. Add the $1300 to your child's wages and it is less than the amount required to file. Your child can file a return to claim any tax withheld, otherwise, no need to file a return.

It is also considered unearned income for the kiddie tax, you are below the limits for filing that income on your return.

You are not being taxed on the $1300 at all unless you have some other circumstances not disclosed.

References:

• A quick quiz, Filing requirement  to double check filing requirements
• A quick quiz, Scholarship, fellowship or education grant - Do I include it as income on my tax return?
• Article What is the Kiddie Tax?

[broncos4ever]

So do I put it as a line item on the 1099 Misc section or do I just adjust it to $1300?  It is over the qualified expense but all of the scholarship paid for room and board (which I thought was taxable).

[KrisD15]

To clarify, it isn't clear to me what you mean by "It is included on the 1098-T". Do you mean it was included on the 1098-T Box 1, payments received, or 1098-T box 5 scholarships? 

Scholarships are not normally reported on a 1099-MISC.

If the money "could be used for anything" it sounds more like "Other income", not Scholarship income". 

[Hal_Al]

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).  

So, bottom line: your child is not required to file a tax return because her total income ($2500 + 1200) is less than her filing requirement. 

If she did need to file, you might have to make  adjustments because of the double reporting (1098-T and 1099-Misc).  I would just not enter the 1099-Misc, since the money is on the 1098-T (the proper place).  There's a small chance of hearing from the IRS, but it's easily explained. Your employer erred in issuing the 1099-Misc. If you enter it as 1099-Misc "other income" it will be treated as unearned income and become taxable. 

The alternatives, frequently mentioned in this forum:

If you received an erroneous 1099-Misc, you have several choices:

1. Ideally, you get a corrected 1099-misc from the payer
2. Don't report it on your return. Attach a copy of the 1099 and a statement explaining the circumstances. You can't e-file. From the old IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.
3. Report the income as misc line 8z, Schedule 1 income  (enter in TurboTax at the 1099-Misc screen and identify it as sporadic income ["did not involve intent to earn money"]). Then enter a line 8z deduction, for the same amount.  In TurboTax (TT), enter at:
   - Federal Taxes tab
    - Wages & Income
   Scroll down to:
   -Less Common Income
         -Misc Income, 1099-A, 1099-C
          - On the next screen, choose – Other reportable income -  Answer yes to Any other Taxable Income -On the next screen, Enter the number with a minus sign (-) in front.  Briefly explain at description. Call it something like "erroneous 1099 received"
4. Do nothing and hope you can explain it away when & if the IRS contacts you (my choice in your case)

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[Hal_Al]

You say some of the  scholarship is considered taxable because it exceeded the qualified expenses.

 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”.