Form 1098-T

[jmo2020]

In the Form 1098-T for my dependent son at college last year (Tax Year 2023), Box 1 correctly shows $7500 as the total amount of payments the college received from me for my son's qualified tuition and related expenses (i.e., tuition and mandatory fees, but not books or room and board), and Box 5 correctly shows $5000 as the total amount of his scholarships, but TurboTax is using these numbers to generate a net qualified education expense for me in the amount of only $2500, i.e., $7500-$5000. What do I need to do so that TurboTax shows my total out-of-pocket payments for qualified education expenses was in fact $7500, not $2500?

[Bsch4477]

When you go through the education credit interview you will be asked if your student used the scholarship for room and board or other things. Click yes and report $1,500 that was used for non tuition expense. That amount will be income to your student but will not be taxed on his return if he has no other substantial income or very little. You will get the full $2,500 credit for spending $4,000 out of pocket. This is a legal loophole fully explained in the examples in Pub 970 if you want to check it out. 

[Hal_Al · Accepted solution]

Room and board (R&B) are not qualified expenses for a tuition credit or tax free scholarship. 

Q. What do I need to do so that TurboTax shows my total out-of-pocket payments for qualified education expenses was in fact $7500, not $2500?

A. There are two ways to do it. The easy way: just enter the 1098-T with $4000  in box 1 and 0 in box 5*. $4000 of tuition is all you need to get the maximum $2500 credit.  The long way, enter the 1098-T and follow the interview, entering additional expenses for books and a required computer; then (as described at the other reply) allocate some of the scholarship to R&B.  

*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. 

If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)

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 2023 expenses".

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

[Hal_Al]

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 your example: Student has $5000 in box 5 of the 1098-T and $7500 in box 1. At first glance the parent can only claim $2500 for AOC.  But if the student reports $1500 as income on his 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, he would only need to report $500 of taxable scholarship income, instead of $1500.