Health Professions Scholarship Amount Exceeds Tuition

[theengler]

My daughter is currently receiving a Health Professions Scholarship from the US Navy for graduate study.  The government lagged in paying tuition and the current 1098-T form reflects 3 semesters of payments for 2 semesters of tuition which results in an almost five figure tax hit.

I did read that the Armed Forces Health Professions Scholarships are tax free in which case the excess amount (which really isn't an excess) has no tax impact. IF that is true, how do I enter this info in TurboTax?

There is a question 'Did You Receive Any of the Tax Free Benefits Last Year?' regarding the 1098-T to which the bullet items are:

• GI Bill benefits (which it is not)

• Veteran's benefits (might be?)

• Tax-free employer provided assistance (likely?)

Q1:   Should I be checking   'Yes'   to this question?

Q2:   Should I enter the 'excess' amount or the whole amount?

Q3:   If I enter the whole amount, can any of the education credits be taken?

-Thanks-

[KrisD · Accepted solution]

Q1: Yes, you can report this as VA assistance, as it is not taxable.

Q2: There should be one box that asks how much of Box 5 is VA assistance, you would claim the entire amount if it was all from the Armed Forces Health Professions Scholarship. (there is another screen that asks about tax-free assistance received that was not reported on the 1098-T, you would not add anything here)

Q3: No, if the tuition was paid for with the scholarship, the expenses cannot be used towards the education credits. Furthermore, it would appear that the 1098-T may have shown amounts billed on the 2016 1098-T and that the scholarship then paid those expenses in 2017. If this is the case, you need to make sure you did not use those expenses in 2016 to obtain an education credit. If you did, you will need to "recapture the credit". This means you need to re-calculate your 2016 tax return and pay any tax that is due relating to the credit you received for tax year 2016. 

ADDITIONALLY, if the scholarship paid in 2017, but it was billed in 2016, use the "What if this is not what was paid?" link under Box 2 on the 1098-T screen and report what was paid, including the scholarship that posted late. 

According to the IRS:

"You don't have to treat as payment for services the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services if you receive the amount under:

The National Health Service Corps Scholarship Program,

The Armed Forces Health Professions Scholarship and Financial Assistance Program, or

A comprehensive student work-learning-service "

"Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2016, or any refund of your qualified education expenses paid in 2016, is received after you file your 2016 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2016 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2016 and figure the amount by which your 2016 tax liability would have increased if you claimed the refigured credit(s). Include that amount as an additional tax for the year the re-fund or tax-free assistance was received."

CLICK HERE for IRS Pub 970 Education Credits

CLICK HERE for TurboTax information on Education Credits