Form 1098T, Education Tax Credit and Dependency Determination

[Luna_Tax]

Hello.  I have some questions regarding Form 1098-T and student dependency.  I apologize in advance for my lengthy post as I was trying to provide sufficient background.  Our son is a full-time student (under 24) who received a 1098-T for 2025: Box 1-Qualified Tuition $70k; Box 5-Scholarships $100k thus $30k in taxable scholarship.  The scholarship fully covered his tuition and room and board (about $18k-$20k) plus some living expenses.  He also received W-2 (wages), 1099-Misc (stipend/fellowship) and a small 1099-NEC (freelance).

1-Can we still claim our son as a dependent in 2025 based on above?  A question under the "personal info" in Turbo Tax (“TT”) for student asks “Did you provide over half of your own “support” with “earned income” during the year?”  How are we supposed to answer that?  Wages are “earned income”, but what about 1099-misc income and scholarships that are NOT reported on W-2?  What is exactly considered “support”?  His majority of expenses for the year were for 2 semesters of tuition and room and board which were fully covered by his scholarship.  We also paid for some of his living expenses.  Is there a certain $ threshold for “earned income” and “support” to determine whether a child is considered dependent or not?

2-If student is a dependent, TT Forum always advises to do the following for entering 1098T numbers in TT.  Input $4k in Box 1 (tuition) and 0 in Box 5 (scholarships) on parents’ return in order to take advantage of the full education tax credit of $2,500 and for the students to include an additional $4k of scholarship monies on their returns.  If we claim him as our dependent, can we choose to use a lower tuition number in Box 1 (i.e. $2k) instead of the maximum allowable amount of $4k?  If so, our son also needs to report the same amount (i.e. $2k) as additional scholarship on Sch 1, line 8r (total scholarship: $32k=$30k+$2k), correct?

3-If he is not considered a dependent for 2025, how do we change the information in TT for both the parents and the student to reflect that?  In Parents’ TT: Do we “delete” the input tab for him as a dependent in our TT or do we keep that tab and in later screens choose that “he lived with us for whole year” and “he paid for more than half of his living expenses” to trigger he is NOT a dependent?  In Student’s TT:  I tried to change the “dependency” selection by doing the following in his TT so he is NOT a dependent.  Under the “personal info” tab I did NOT select “Another taxpayer can claim you on their tax return” and instead selected “none of the above”.  Then a few questions later, I selected “yes, I (i.e. my son) provided over half of my support with earned income”.  I then entered Form 1098T information in my son’s TT (Box 1-$70k and Box 5-$100k).  TT showed the $30k as scholarship on his Sch 1, line 8r, but it did Not generate any AOTC for him and a message appeared after the Form 1098T was entered that “my son does not qualify for education tax credit because: somebody else can claim him as a dependent on their return and there were no net qualified education expenses.”  This statement doesn’t make any sense to me when I specifically had selected that nobody else was going to select him as a dependent.  It appears to me if he files his return as a “not dependent”, he cannot take advantage of any education tax credits.  So how can a student who is NOT a dependent take advantage of a full/partial education tax credit on his return?

Thank you in advance for your time and insight.

[Hal_Al · Accepted solution]

Q. -Can we still claim our son as a dependent in 2025 based on above?  

A. Probably.   For the dependent support issue, you ignore scholarships. The $100K  and the 1099-MISC stipend/scholarship and what they paid for (tuition and room & board) do not count as support.  It may depend on how much the W-2 and 1099-NEC are. 

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on himself.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

The IRS has a worksheet that can be used to help with the support calculation. See:

https://sites.allegheny.edu/human-resources//files/2019/05/IRS-Worksheet-for-Dependent-Tax-Status.pd...

Q. If we claim him as our dependent, can we choose to use alowertuition number in Box 1 (i.e. $2k) instead of the maximum allowable amount of $4k? 

A. Yes

If you decide that he will not be your dependent, for 2025, come back and we'll deal with the remaining issues.  He can get the AOTC, it's just a matter of following the interview carefully and adjusting the 1098-T. 

[NCperson]

@Luna_Tax use the worksheet on page 16

https://www.irs.gov/pub/irs-pdf/p501.pdf

@Hal_Al - the link in your post no longer works, but I suspect the worksheet above is what you were refering to???

[Luna_Tax]

Thank you very much to @NCperson for the updated link.

[Luna_Tax]

Thank you as always @Hal_Al for a quick and helpful response.  I really appreciate your taking the time to help and educate us.

I initially had interpreted that the living expenses such as rent and utilities of a “dependent” college student, should be allocated based on the period that they were “physically” present at the parents’ home.  This is usually 3-4 months a year for a full-time student who returns home for summer and winter breaks.  By reading Pub 501 and your explanation, it seems that the lodging expenses or “Fair Rental Value” is allocated to dependent students on an annual basis, whether they have “physically” lived at home with the parents for the whole year or they attend an out-of-state college and only return home for breaks and holidays.  This method certainly helps parents to meet the support test for a qualifying child and claim the students as their “dependents” on the parents’ returns.

The total of my son’s wages and Sch C (self-employed) earnings was about $9k.  As you mentioned per Pub 501, scholarship and savings of student-child are not used in determining whether the child provided more than half of their own support”.  And it seems we do not need to include federal, state and local income taxes paid by students from their own income and scholarships in the total support calculation either.  These are all great news.  However, Pub 501 did not seem to address how to treat the income from Form 1099-Misc.  I assume if the 1099-Misc income is from rental property then it is considered “earned income”.  But if it’s from summer internships, travel or research stipends, fellowships and such, the 1099-Misc income is not considered “earned income” for purposes of the child dependent support test so they can be excluded like scholarship monies.  Is that correct?  Thank you again for your time and insight.

[AmyC]

Let's look at the support test:

• Scholarships are not included because they are especially exempt from the calculation, not because they are unearned income.
• The IRS looks at the funds actually spent by the child on their own support.
  • Rental income -if receives and spends, it is support
  • Stipends, grants, fellowships: generally taxable income and if spent on himself, counts as supporting himself.
  • Saving vs spending is part of the equation
  • Vacations you take him on and other things you do also count as support. There used to be a much more detailed worksheet for support.
  • Healthcare - medical premiums, copays, deductibles, vision, dental, etc
  • Transportation - car, bike, gas, bus tickets
  • Food and clothing

Earned and unearned income matter when it comes to the standard deduction and the kiddie tax.