19 year old Sophomore attends full time college in a different state. Receives $6600 more than billed qualified tuition and related expenses on 1098-T. Who claims her?

[bobandpeggy]

Not sure if we claim her and her scholarship or if she should file independently.

[Hal_Al · Accepted solution]

One more issue to consider.

 There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, as income on his return. That way, the parents 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 $16,600 in box 5 of the 1098-T and $10, 000 in box 2. At first glance he/she has $6600 of taxable income and nobody can claim the American opportunity credit. But if she reports $10,600 as income on her return, the parents can claim $4000 of qualified expenses on their return.

She will pay about $400 more tax, but the parents will get $1000 to $2500 on their return.

[ChristinaS]

The taxable scholarship would always be the child's income. So, you can input the 1098-T on her tax return just to get the scholarship in her income. The IRS doesn't see all the background entry- they'll only see the taxable scholarship on line 7 of her 1040. Either way, she'd have a tax return to file.

As far as who should claim her (i.e. should she claim herself?), that depends on whether she provides more than half of her own Support. Does she also work? Does she live in your house?

Just keep in mind:

Scholarships.    A scholarship received by a child who is a student isn't taken into account in determining whether the child provided more than half of his or her own support.

(You would count the taxable part, but not the whole thing)

[ChristinaS]

(A child is considered to live with you if away from home for school.)

[Hal_Al]

You should claim your child as a dependent, even though she will be filing a tax return and reporting income.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled

2. He did not provide more than 1/2 his own support. Scholarships are considered third party support and not as support provided by the student.

3. He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self. The support value of the home you provided is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim his own exemption. If he has sufficient income (usually more than $6300), he can & should still file taxes; he just doesn’t get his own $4050 exemption (deduction). In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.