Graduate assistant with W2 and 1098-T scholarship how to get Lifetime Learning Credit

[joshblackis19]

Son is a graduate assistant and employed by the University as asst football coach. W2:  wages $46,000; federal tax w/h $2,100; SS wages $11,700.  I knew right away they didn't take out enough fed withholding, even though he claimed 0 on his W4.  Why such a discrepancy on wages and SS wages?  No clue!  1098-T lines 1 and 5 are:  $7,700.  No other boxes.  He owes almost $2,000 to the IRS!!!  The $7,700 is all paid for by the University, who is his employer and as a grad asst must take Master's classes at least half time.  The software questions go like this: "What portion of the $7,700 is employer tuition assistance?" "Now tell us if you're including any of your REMAINING grants/scholarships in income?" "Why you might want to do this." In the past, I was told to add $4,000 to income, as it was the maximum to claim the LLC and it did lower the tax burden.  I'm still confused!  Is $4,000 the amount I add to his income? Please help me understand and tell me where to put the correct figures!  Thanks.

[Bsch4477]

His 1098-T suggests that his tuition expense was exactly covered by his scholarship amount in which case there are no qualifying education expenses and so no education credit. 

[joshblackis19]

So, I can't add $4,000 of the scholarship, to his income to take the credit?  That's the part I never understood, when someone else suggested that?  Also, He is technically an "employee" of the college, any idea why his W2 wages and social security wages show such a vast difference?  Does that mean anything as far as his taxes, other than he owes A LOT because withholding wasn't nearly enough!  Thank you.

[ErnieS0]

$4,000 is the maximum amount for the American Opportunity Tax Credit. The Lifetime Learning Credit provides a 20% credit up to $10,000 of eligible educational expenses.

It's possible the amount in Box 1 includes educational assistance, meals, lodging or transportation,

[joshblackis19]

Oh, yeah, that's right LLC is up to $10,000.  So, what does the amount in line 1 mean to his taxes? He gets a salary/paycheck which he pays his own living expenses.  The scholarship is tuition, fees only.  Can he use any of that scholarship figure of $7,700, add to his income and take the credit?  I may be dreaming here, but why did the tax software ask me how much of the scholarship do I want to include in income? Thank you.

[Hal_Al]

Q.   Why such a discrepancy on wages and SS wages?

A.  "Regular" students who also work part time for the school are exempt from SS tax. It sounds like, that at some point, his status  went from a "student working part time" to being a regular "employee who is also taking classes".

As to the 2nd question, the answer is simple: he is not eligible for either the AOC or the LLC.  This is because his tuition was paid for by tax free help.  It doesn't matter whether it's called scholarship or employer assistance or tuition remittance (which is what it really is), he can't claim it.  Just don't enter the 1098-T.   Technically the school erred in reporting the 1098-T that way (but it's done often).  

The famous  "loop hole" of declaring some of the "scholarship" taxable in order to claim the credit is not available in this case as the "scholarship" is restricted to tuition.  Technically, the loop hole is not available because the assistance is not scholarship, but tax free assistance. Besides, grad students are only eligible for the LLC,  so there wouldn't be much, if any, savings.  The LLC is only worth 20%.  His marginal tax rate is 22%.  He might even have to pay more tax (I didn't do the calcs).

[joshblackis19]

Hi, well it's not the answer I wanted, but what you tell me makes sense:(  He owes almost $2,000.  Shouldn't he call the school financial office and have them take out "more" federal taxes?  It's so low, the tax software is trying to make him pay an "underpayment" penalty!

And one more "angle."  Could he claim the scholarship $7,700 as employee expenses?  Of course, he didn't pay for the tuition, but I'm trying, lol.  Poor kid, has no other deductions or write-offs.  Thank you very much for the information!  I appreciate it.

[Hal_Al]

Yes, he submits a new w-4 to his employer to increase withholding.

An underpayment penalty is due if:

- 1. You  owe at least $1,000 in tax for the current tax year,

and
- 2.  your withholding and credits is less than  90% of the tax to be shown on your current year’s tax return and  100% of the tax shown on your prior year’s tax return. 

Q. Could he claim the tuition (scholarship) $7,700 as employee expenses?

A. No. 1. because he didn't pay it. 2. Employee expenses are no longer deductible. 3. Even under the old (pre 2018), education as an employee expense was very restricted

[joshblackis19]

Thank you, again.  Just ONE MORE TRY here, lol.

Following the interview questions on the tax software it asks:  "what portion of the $7,700 scholarship was employer tuition assistance?"  I put in $7,700.  It gives him $500 LLC.

Software further asks, if we're including any of scholarship as "income?"  In playing with that area, if I put in various dollar amounts, it gives a greater LLC.  If I put in all $7,700 I get the max $2,000 LLC.

Is what I'm doing "wrong"?  I mean, I'm following the interview questions as stated in the software?

[Hal_Al]

It's not clear what you're doing wrong.  But yes, you're doing lot's of things wrong.  You can't possibly get $2000 LLC based on $7700 expenses.  I don't recall ever seeing "what portion of the $7,700 scholarship was employer tuition assistance?" and it wouldn't change things in your favor.   "Including any of scholarship as income" would indicate it's optional; it's not. 

[joshblackis19]

I'm still debating/reading/researching on how to handle my son's 1098T as graduate assistant.  Here's the bottom line:  1098T boxes 1 and 5, $7748.  Tax software questions ask me this:  "You told us that you have $7748 of scholarships, grants or other other aid. What portion, if any, of the $7748 was employer tuition assistance?" ALL OF IT WAS.  I put in $7748 in the box "employer tuition assistance."  Going forward:

"Now tell us if you're including ANY of your remaining  grants and scholarships in income." "why you might want to do this" Another box: " grants or scholarships you're including in income." _______??? Don't know what to put in there? If I put in the whole $7748 I get the $2,000 LLC, which I'm told is not correct.  If I put in $5250, I get $1500 LLC.  If I put in $2498 (difference between $7748-$5250) I get another figure for LLC.

I really still don't understand this whole situation, and I'm sorry to keep harping on this again and again,  so I'm just asking WHAT amount to put into the SECOND BOX which asks grants or scholarships you're including in income????

This is very important to my son, who technically can owe IRS $2,000 without this LLC!!!  Thank you.

[RobertB4444 · Accepted solution]

@joshblackis19  If you decide that you have used the scholarship amount to pay for something other than tuition and fees (and qualified materials) then you can enter the amount that was used for that as income.  It will be taxed in addition to his W2 income.  I'm not sure that it will improve his tax situation.  But you can give it a try.

And yes - increase his with holding.

[joshblackis19]

Hello, so the amount I would put in that "box" is not $5250 or $2498 or the full $7748??  Ok, that's what I needed to know.  Thank you.