College Education Expenses
Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:
- Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*
- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.
Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.
Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”. The first one indicates a choice. The second one provides no choice.
If the student:
Is under the age of 24 on Dec 31 of the tax year and:
Is enrolled in an undergraduate program at an accredited institution and:
Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a half time student) and:
the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)
Then:
The parents will claim the student as a dependent on the parent's tax return and:
The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:
The parents will claim all educational tax credits that qualify.
If the student will be filing a tax return and:
The parents qualify to claim the student as a dependent, then:
The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.
Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.) Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.
In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.
If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6200, then the student doesn’t even need to file a tax return, and nothing has to be reported.
If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.
Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6200, then the student should file a tax return so as to get those withheld taxes refunded.
1099-Q Funds
First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to line 21 of the 1040 with an annotation of "SCH" next to it.
Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is transferred to line 21 of the 1040 with an annotation of "SCH" next to it.
Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.
When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.
Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over that are taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.
Carl, excellently detailed answer. Can you comment as to how this would apply to a Qualifying Relative (daughter-in-law) instead of a Qualifying Child (son)? All criteria are met, but she did earn more than $4k. TTax says she does not qualify as a dependent. But being a full-time college student, the $4050 limit should not apply I thought. Does it?
For a full time college student, the students income is irrelevant. They could earn a million dollars and still qualify as your dependent. It sounds to me like your issue is that you indicated the dependent college student lived with you for LESS than the whole year. Work back through that dependent's information again under the Personal info tab. Then on the screen that asks how long they lived with you, read the small print on that screen so that you will understand why you are changing your selection on that screen to "The Whole Year". Then make the change and continue working through the dependent's information until you get to a screen with a DONE button on it. Then click that DONE button. Your change does not stick until you reach a screen with a DONE button on it, and actually click that DONE button.
I think the difference is if my "child" is a college student and earns money VS someone who want to claim as a dependent (not a child). If they are not my child, they can earn up to $4,050 and qualify as my dependent, but if they earn more than that amount, they do not qualify as a dependent for exemption for me.
That is correct. If the student was over the age of 23 on Dec 31, they would not fall under the dependent child rules. They would be under the Qualifying Dependent Relative rules, which poses an income limit of $4050 for them to qualify. So if this is your case, then your daughter will be the one to claim all the education stuff, even though you may have been the one who paid for it.
[JustAnother's] Daughter-in-law is not a qualifying child because she fails the relationship test.
She is not a qualifying relative because she fails the gross income test.
It doesn't matter whether she is in college.
No, a daughter-in-law cannot be a qualifying child. Daughter-in-law is not among the relationships listed in the relationship test for qualifying child, and a daughter-in-law is not a daughter. But a daughter-in-law can be a qualifying relative. See IRS Publication 501 or Publication 17. Or 26 US Code subsection 152.
The link you point to conflates the two kinds of dependents, so do not conclude when it says "dependent" it means "qualifying child dependent."
If you are trying to claim a daughter-in-law as a dependent, it can only be as a qualifying relative. You will see daughter-in-law listed among those that can be claimed as a qualifying relative even if not living with you.
My daughter goes away to college. How do I claim the months she lived with me?
@Bmont74 wrote:
My daughter goes away to college. How do I claim the months she lived with me?
Where asked how long she lived in your home select the Whole year in the dropdown if she would normally live in your home and she is only temporarily away from the home due to school.
how are student loans classified? is it the same as scholarship/grants?
No, student loans are considered payment by you (same as cash) because you have to pay the loans back.
My son a full time college student withdrew money from his 529 for almost 100% of his room and board in 2020. He received a 1099-Q for the amount withdrawn.
1. can I still claim him as a dependent?
2. Turbo tax seems to want to tax the entire amount of the 1099-Q and will not let me put his expenses in on his 1040. Is this because he is my dependent?
Q. Can I still claim him as a dependent?
A. Yes. Since you are the "owner" of the 529 account, the money counts as support provided by the parent, not the student. He is only the "beneficiary" of the account. The fact that the money (and the 1099-Q) went to him (he is the "recipient"), instead of you, does not change any of that. It does change, who has to report the distribution, if anybody.
Q. Turbo tax seems to want to tax the entire amount of the 1099-Q and will not let me put his expenses in on his 1040. Is this because he is my dependent?
A. No. The interview is tricky (to get the screen to enter Room & Board, answer yes when asked if you have book expenses, among other things). Since the entire distribution was used for qualified expenses, just don't enter the 1099-Q, at all. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
______________________________________________________________________________________________
Qualified Tuition Plans (529 Plans) Distributions
General Discussion
It’s complicated.
For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.
You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit, that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.
Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)
-$3000 paid by tax free scholarship***
-$4000 used to claim the American Opportunity credit
=$3000 Can be used against the 1099-Q (usually on the student’s return)
Box 1 of the 1099-Q is $5000
Box 2 is $2800
3000/5000=60% of the earnings are tax free; 40% are taxable
40% x 2800= $1120
You have $1120 of taxable income
**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip! When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.
On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings.