Education assistance counts as income

[Sam78]

When entering my Son's 1098-T I get the message "It turns out --'s Education Assistance counts as income" However his assistance was less than the cost of tuition and books, etc. and the other reasons given in the message do not apply.

All the similar posts I can find say to go back and make sure everything was filled out correctly. I've done that and even compared it step for step with 2022's return and I still get this error. Please see the attached pictures.

Any idea how I can fix it?

[Hal_Al]

Typically this happens because TurboTax allocates the expenses ($2631 + 267 = $2898) to the tuition credit, allowing you to claim the American Opportunity Credit (AOC) on your tax return. That means there are no longer any qualified expenses left to allocate to the scholarship. What was tax free scholarship ($1789) is now taxable on the student's tax return. 

If that is his only income, he will pay no tax. Technically, he doesn't even need to file a tax return.  But you may want to have him file anyway to document the reporting of the scholarship income that allows your to claim the  extra AOC.  With those figures, the AOC is worth (up to) $1116 more than if he did not treat the scholarship as income. 

[Sam78]

He did have enough income that he was required to file a return which he already did. I didn't think this would be an issue as last years numbers were similar and I did not get this error otherwise I would have had him wait to file the return. Is there a way to allocate the expenses to the scholarship so we don't have to mess with redoing his return?

[Sam78]

Here's last year's Education Summary it's the same basic idea so why was this not an issue last year?

[Sam78]

I went back to "Your Education Expenses Summary" and deleted everything to do with my son and then re-added everything and I did not get that message again.

Is that because TurboTax figures it already gave me the notification so doesn't need to do it again or was it a fluke the first time? Or what's going on here?

Thank you so much for your help.

[Hal_Al]

Q.Is there a way to allocate the expenses to the scholarship so we don't have to mess with redoing his return?

A. Yes. On your return enter the 1098-T with only $842 in box 1 (2631 -1789 =842) and box 5 blank. 

Q. Is that because TurboTax figures it already gave me the notification so doesn't need to do it again or was it a fluke the first time? Or what's going on here?

A. It depends on how the info is entered. TT may have given you the full credit without noting the need to report the scholarship 

How much  are you getting for the AOC (line 29 + line 20* on form 1040)?  How much other income did he have?  The family usually come out best Filing an amended return for him to report the scholarship income. Depending on the numbers, an amended return may not be necessary. 

*Line 20 may include other credits (see line 3 of schedule 3 for the tuition credit)

[Sam78]

Thank you so much for the detailed answers!

For the AOC I am getting $1,109 so you are right that it's probably more advantageous to take the education credit and have my son report the scholarship income. His AGI was around $15,000 and his taxable income was around $1,300.

[AmyC]

I am so glad you are getting the AOTC it is much better for the parent to have a big credit. Now, the income to your son isn't much but he may need to pay the kiddie tax so double check before finalizing his return.

Reference:

 What is the Kiddie Tax?

[Hal_Al]

The $1109 AOC  is how much you get now (before he declares any of the scholarship as taxable). You will get an additional $1116 AOC, if he files an amended return declaring the scholarship taxable. 

You do not have to wait for him to actually file the amended return.  You can claim the whole credit now and he can amend later. 

The kiddie tax should not kick in, but form 8615 will be generated to show the kiddie tax calculation.  For the extra $1116 that you get, you son will pay $179 more tax. 

[Sam78]

He's 20 so, if I'm understanding correctly, there is no kiddie tax, right?

How do we go about getting the "extra $1116"? Is that a credit my son gets when he amends his return?

Also, where do we report this scholarship on his return?

Thank you again!

[Hal_Al]

Q. He's 20 so, if I'm understanding correctly, there is no kiddie tax, right?

A. Yes.  There will be no kiddie tax , in your case, because of the amount, not his age.  The kiddie tax applies to full time students, under 24, who do not support themselves with earned income. 

Q. How do we go about getting the "extra $1116"? Is that a credit my son gets when he amends his return?

A. No. You get it on your form. The simple way to do it is enter the 1098-T (on your taxes) with $2898 in box 1 and box 5 blank.  You are allowed to use short cuts.

The alternate (technically correct} way is enter the 1098-T, as is ($2631 in box 1 & $1789 in box 5), enter $267 at books.  When asked if any of the scholarship was used for room & board, enter $1789 (that tells TT that he will be making it taxable on his return, R&B are not "qualified" expenses)

Q. Also, where do we report this scholarship on his return?

A.  In TurboTax, enter the 1098-T with $0 in box 1 and $1789 in box 5. It goes on Line 8r of Schedule 1.

[Sam78]

Thank you so much Hal_Al for your detailed and easy to follow answers and instructions, I really appreciate it! Thank you AmyC as well.

I will give all this a try this coming week and then amend my son's tax return the next time he comes over and will then let you know how it went.

Thank you again!

[Sam78]

We amended my son's return over the weekend. He ended up owing $88 but I got the "extra $1116" so it was definitely a win! Thank you so much @Hal_Al for your clear instructions and for encouraging me to go for it, I appreciate your help and time.