Do I need to file my own taxes? I was a dependent and had excess scholarship funds

[reso_lute]

Hello. I'm currently a third-year college student. I have a combination of scholarship and pell grants to cover my expenses. I was claimed as dependent on my dad's taxes in 2019 and 2020. But I never submitted a 1098-T. My scholarship reimbursement was $5,500 for 2019 and $13,761 for 2020 (3 semesters). My first job was in 2020 and it was less than $1,500. Most of those funds are still in my bank account, I'm saving for my graduate school. Am I supposed to file for my own or add to my dad's, my scholarships for 2020 since it's over $12,500? Will IRS get those once I file for my own for 2021?

I was searching over the internet if I'm supposed to file in 2020 for my own but I read that my W2 should be at least 1200 or 1500. But now, I'm not sure of that. Thank you so much.

Also, I was told by our finaid office that I don't need to put those excess funds on my FAFSA app?

[Hal_Al · Accepted solution]

Q.  Am I supposed to file for my own or add to my dad's?

A. You definitely do NOT add your income to to your parent's return, even when you are their dependent.

If you do need to file a tax return, your parent can still claim you as a dependent.  You just check the box, on your return, that says you can be claimed by someone else. 

You say your  scholarship for 2020 was  $13,761. But, you don't say how much your qualified educational expenses (QEE) were.  QEE is tuition, fees, books and other course materials including a required computer.  The taxable portion of your scholarship is the net after QEE, not the full $13,761.  That is, typically, only the portion used for room and board and other living expenses is taxable.  

"I read that my W2 should be at least 1200 or 1500."  That's not true.  

You must file a tax return for 2020 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,400 (2020).
2.          Unearned income (interest, dividends, capital gains, unemployment) of more than $1100 
3.          Unearned income over $350 and gross income of more than $1100 (this may be the number you read about).
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2100 ($12,400 if under age 18)
5.          Self employment income over $432, including money on a form 1099-NEC

Even if you had less, you are allowed to file  to get back income tax withholding. You cannot get back social security or Medicare tax withholding.

In TurboTax, you indicate that somebody else can claim you as a dependent, at the personal information section.

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New subject

You said you never "submitted a 1098-T".  That's probably because scholarship paid for everything.  And that's normally correct. QEE paid by tax free scholarship is not eligible for a tuition credit.  But, there is a tax “loop hole” available. The student reports some 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 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 $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.

It is still possible for your father to claim this credit, on his 2019 and 2020 taxes, by filing amended returns,

This is not some sinister scheme. 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, line 18c, and IRS.gov/EdCredit.  Page 16 of PUB 970 (2019) actually has examples of how to do the “loop hole”.

[reso_lute]

  Hello,

Thank you so much for your response. It helps a lot. Apparently, the $13,761 is what I received after my tuition was deducted from my total scholarships. I bought books but I don't have receipts for that. Can I still claim those? And can I do AOC loophole even with 1098T? 

Also, I still couldn't quite understand how AOC works, and I hope you can take a look at my 1098Ts and help me report them accurately, Thank you so much for your help.

[Hal_Al]

You did not need to file tax returns for 2021 and 2019 and you father could still have claimed the tuition credit using $4000 of the tuition for 2019 and $2584 for 2021. 

The  2019 math is:

 $10,774  Scholarship

-      5425 Tuition

=    5319  Excess scholarship

+    4000  of Tuition used by parent to claim tuition credit

=  $9319  Taxable scholarship

Since that is less than the $12,500 filing requirement, you are not required to file a tax return. BUT, you may want to file one anyway to document the justification for your parent claiming the credit 

The 2020 Math:

 $20,397  Scholarship

-      6636 Tuition

=   13761  Excess scholarship

+    4000  of Tuition used by parent to claim tuition credit

= $17761  Taxable scholarship

+      1500  Wages

=   19,261   Total income.  You must file a tax return.  You are still a dependent of your parent, despite the high income.  This is because scholarships are disregarded for the dependent support test (despite being "income").

New wrinkle:  Box 7 on the 2020 1098-T is checked.  This might mean that some of the amount in boxes 1 and 5 may be needed to be allocated to 2021. The 1098-T doesn't tell you how much. You would have to know that from your own financial records. 

[reso_lute]

Thank you.

So if I understand it correctly, I will claim an extra 4,000 as income so that my parent can claim AOC? But can I claim it myself? Will I be given a penalty for not filing in 2020? And to amend my dad's return for 2019 and 2020 for AOC, can I do it here at TurboTax? Or can I claim it myself? I have another 1098T for 2021 and have around 6,000 in W2s so I will file for 2021. Can I claim 2021 AOC then?

I really appreciate your help.

[Hal_Al]

Q. So if I understand it correctly, I will claim an extra 4,000 as income so that my parent can claim AOC? 

A.  Yes

Q. But can I claim it myself?

A.  Not if you are or CAN BE a dependent.  You cannot get the refundable portion (the bulk in your case) if you are a FT student, under 24, with little or no earned income. 

Q. Will I be given a penalty for not filing in 2020?

A. Yes. There is both a late filing and a late payment penalty.  You just file your late return. The IRS will bill you for the penalties. 

Q. And to amend my dad's return for 2019 and 2020 for AOC, can I do it here at TurboTax?

A.  Yes.  

How to amend https://ttlc.intuit.com/questions/1894381-how-to-amend-change-or-correct-a-return-you-already-filed

Q. Can I claim 2021 AOC?

A.  Not if you are or CAN BE a dependent.  Not if you are a FT student, under 24, who's earned income was less than half his support.  The TurboTax interview asks those questions

[reso_lute]

Got it! Thank you so much

[reso_lute]

Hello. This is what I have entered on my scholarship section for 2021. I chose no when it asked if I have reported some of the scholarships in my W2. In what form do I enter the taxable scholarship? I thought it'll be 1099-MISC but I didn't receive one. I think I have about 7,000 in excess scholarship for 2021. Also, is there a way I can directly receive the AOC even if my parent will claim me since I live w/ him? I pay for my food/school supplies, but my dad pay for rent and car insurance.

If I don't claim AOC, do I just report the excess scholarship that went through my bank?

[Hal_Al]

Q.  Is there a way I can directly receive the AOC even if my parent will claim me?

A. No.  The tuition credit "goes with" the student's exemption (dependency).  Only your parent can claim it.

Q. If I don't claim AOC, do I just report the excess scholarship that went through my bank?

A. No. You claim all scholarships that exceed your qualified expenses, regardless of the vehicle for the money. 

You say " I think I have about 7,000 in excess scholarship for 2021".  

I see $21,723 -2584 - 7447 - 71 = 11,621. If you want to declare another $4000 taxable, to allow the parent  to claim the A0TC, there are several ways to do it. 

The "proper way" is Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it to $4000.   TT will add $4000 to taxable scholarship. You may reach that screen sooner.

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s  return. The alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T (change 7447 to 3447).

TT will report $15,621 as taxable scholarship (11,621 +4000).

[reso_lute]

Thank you! 

And I will deduct 4,000 from 1098T box 1 in my 2020 tax so my dad can do an amendment for his 2020?

It made my tax due higher. And it's telling me I can't claim tax break which is correct right? How much can we possibly get from AOTC?

[Hal_Al]

$2500.  The AOTC is very generous. You get 100% of the first $2000 of tuition and 25% of the next $2000.  40% is refundable. So for claiming $4000 of tuition, he gets  $1500 off his tax and another $1000 whether he has a tax liability or not.