Do full-time undergraduates need to pay tax on scholarships? (1098-T)

[xf3]

I am an undergraduate at a full-time college in another state. (I am claiming residency in my home state, which I am allowed to do.)

Both of my parents are living. They can claim me as a dependent. 

I have a 1098-T with approx. $53,000 in box 1 (payments received for qualified tuition and related expenses) and approx. $20,000 in Box 5 (Scholarship or grants). 

TurboTax says I need to pay federal income tax on the $20,000. This happens whether I tell TurboTax that my parents are taking me as a dependent or not.

Is this right?

[Hal_Al · Accepted solution]

Q. Is this right?

A.  No.  You've made an entry error.  Just delete the 1098-T.  It does not need to be entered on your tax return*.

Scholarships that are used for  qualified expenses (tuition, fees, books and other course materials) are tax free.  Since box 1 of the 1098-T exceeds box 5, none of your scholarship is taxable.

Your parents should enter your 1098-T, on their return, to claim the tuition credit, if they are otherwise qualified (income is not too high). 

*The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or deduction or possibly your student has taxable scholarship income.  You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. 

If your parents  claim the tuition credit, they do need to report that you got one  (the TurboTax interview will handle this)