Entering Excess Scholarship Funds as Income

[Bobawa95]

My son (who I can and do claim as a dependent on my return), received a 1098-T for first time.  He did not receive a W-2 as he has no income.  Box 5 of his 1098-T exceeds Box 1 by less than $100.  He does not meet the threshold for filing a return, but Turbo Tax indicated to me on my return that my son had to file.  Maybe I'm being paranoid, but do I need to include this small amount as income on my return?  How do I do that within Turbo Tax?  Thanks.

[Hal_Al]

 Q. Do I need to include this small amount as income on my return? 

A.  No. In fact, you are not allowed to put his income on your return.  If it needs to be reported, it goes on his separate return.  It is not enough to need to be reported.

Your dependent child must file a tax return for 2021 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,550 (2021).
2.          Unearned income (interest, dividends, capital gains, unemployment, taxable portion of 529 distribution) of more than $1100.
3.          Unearned income over $350 and gross income of more than $1100
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2300 ($12,550 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

_________________________________________________________________________________________

There is a tax “loop hole” available. The student reports all 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.

[Bobawa95]

Thank you very much for your prompt response!

[hlong9999]

The scholarship exceeds tuition by about $2000
School didn't issue 1098-T because scholarship exceeds tuition.

What if the son didn't receive the 1098-T, is the son required to report $2000 on his tax return?

[Vanessa A]

Whether or not you receive a tax document does not determine whether or not you have to include income on your return.  If your son was in school, and has other income that will require  him to file a return (when you add in the $2,000) he will need to include the income on his return.  Any time taxable income is received it is the responsibility of the person receiving the income to include it on their return. 

Taxable and Nontaxable income

[Hal_Al]

Q. Son's  scholarship exceeds tuition by about $2000, is the son required to report $2000 on his tax return?

A. Yes, if he is otherwise required to file a tax return.  $2000 of taxable scholarship, alone, is not enough income to trigger a tax filing requirement.  The $2000 can be reduced by additional QEE (qualified educational expenses), fees, books, other course materials, including a computer. But, room & board are not QEE.

Q. What if the son didn't receive the 1098-T?

A. The excess scholarship is still taxable.

Q. Because his scholarship exceeds tuition, does that mean the parent cannot claim a tuition credit?

A. Normally yes, but there is a "loop hole" available. 

 The student reports all 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.

Q. Can I do the loophole without a 1098-T? 

A. Yes. In TurboTax (TT), after answering no to getting a 1098-T, answer yes to qualifying for an exception (you do).