Do I owe money because my parents paid in fall of 2020?

[rabbitnose]

Hi,

I graduated from university in spring of 2021 and am currently filing as independent. Previously, I was claimed as a dependent by my parents. 

My parents apparently paid my tuition and other university expenses in the fall of 2020 (within the 3 months that my spring 2021 classes would commence). They already claimed this in their taxes. As a result, my 1098-T form has a value of 0 in Box 1 (tuition/expenses) and a value of thousands of dollars in Box 5 (scholarships or grants). My tax preparer says that because of this, the difference between scholarships and expenses results in an income; thus, I owe money. 

This all seems very convoluted, and I feel like there surely has to be some kind of workaround for this?

[RaifH · Accepted solution]

This is fairly common since academic years don't line up with tax years very well. Since your parents claimed the tuition expenses for your spring 2021 classes but did not claim the scholarship amount received for that semester due to how the payments fell, the onus would be on you to report the scholarship amount as income this year with no offsetting expense. 

There are two possible workarounds. One is for your parents to refigure their education credit on their 2020 return to include your 2021 scholarship income. The 1098-T from 2020 should have the box checked that indicates the tuition includes amounts for the spring semester in 2021.  Therefore, you can move the scholarship to their prior-year return to line up the expense with the reimbursement. They will have to refigure their education credit based on including your scholarship income. This may cause them to owe significant taxes, or it may cause no difference whatsoever. That depends on several factors, such as which education credit you received, how much scholarship income was reported to you in 2021, and whether any payments were made for your tuition with an education savings account. 

If your tuition in 2020 was far greater than your scholarships received, even when you include the amount reported in 2021, they may not have to repay any credit at all. The same is true if they did not take an education credit due to their income level. 

Another workaround is if you had expenses for school fees, supplies, and books that you paid in 2021. You could use these to offset your scholarship income. You can include those expenses in the 1098-T information. 

[Hal_Al]

Your tax preparer is correct.  The tuition credit is applied to the year the expenses were paid (as long as the 3 month rule is met).

However, there is frequently a mismatch of years for box 1 and box 5.  That portion of the scholarship would not be taxable. It may best be explained by example.  Suppose you were billed for $10,000 in December 2020 for the Spring 2021 term. Your parents only paid $7000 because they knew scholarship would pay for $3000.  The school didn't apply the $3000, to your account, until January.  So, that $3000 was included on the 2021 1098-T, instead of the 2020 1098-T.  That $3000 isn't taxable

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 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. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2021 expenses".