How do I know how much of my scholarship is taxable?

[Andyk1178]

I'm going through TurboTax and I'm on the 'Taxable Scholarship and Expenses' section of the income.

I am married, filing jointly and my wife is a full time student. She received form 1098-T (no W2 for her), I'm puzzled on how I'm supposed to know how much of her scholarship is taxable. How do I find this value out?

There are two boxes in form 1098-T that have numerical values, box 1 (Payments received for qualified tuition and related expenses) and box 5 (scholarships or grants). Is the taxable scholarship amount equal to box 1 - box 5?

[NCperson]

it's the other way around.

if  Box 5 exceeds Box 1, the net is taxable

if box 1 exceeds Box 5, you are eligible for the AOTC credit (income below $160,000)

just key the form into TT and it will figure it out.  why do you feel compelled to figure it out (just curious) , that is what you are paying TT for. 

[Hal_Al]

The simple answer is: if box 5, of the 1098-T is more than box 1, the difference is the taxable scholarship amount. Taxable scholarship, including Pell grants, is the amount of the scholarship that exceeds qualified educational expenses (QEE-tuition, fees and undergraduate course materials).  So, the difference between box 5 and box 1 can be reduced by other QEE, not shown in box 1, like books.

If box 1 is more than box 5, none is taxable.

There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, as income on his (your joint) return. That way, you can claim the tuition credit on your joint return. You 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 you can not claim the American opportunity credit. But if she reports $6000 as income on your return, then you can claim $4000 of qualified expenses for the tuition credit.

[NCperson]

@Hal_Al - but in this case, they are married, they can't be dependents of others......

[Hal_Al]

They can still use the "loop hole" on their joint return, by increasing the taxable amount of scholarship.  Unlike a student-dependent, they would pay more in tax, but the American Opportunity credit is so generous (100% of the first $2000 and 25% of the next $2000) that it would more than make up for the additional tax.  

[NCperson]

can you please document what in the IRS publications causes that loophole to exist? 

Look at the flowchart in publication 970 on page 13.  the 2nd to last box clearly states that if the same expenses is paid for with the scholarship,. it's netted out of the eligible dollars for AOTC.   How do you create a loophole from that?  

"were the same expenses paid entirely with a tax-free scholarship...."

[Andyk1178]

TT is asking me for the taxable amount and so I think I need to figure it out myself. 

So boz 5 is greater than box 1, so the taxable is the difference between them both? So my initial thought was correct. Thank you!

[NCperson]

post the 1098-T exactly as it is presented to you. 

box 5 is the amount of the scholarship and box 1 is what was paid to the college for tuition and other related fees.... therefore you should received the money that was not used for 'tuition or other related fees'.    you should have that extra cash.

if you used some of the cash for books that were REQUIRED for class that were not purchased at the university, you can increase Box 1 by that amount (TT asks about that).  (the books purchased at the university should already be in Box 1)

but if you spend the extra money on room and board, computer and related supplies, books that are not required for school (like a dictionary or notebooks or other school supplies),  that money is taxable to you. 

[Andyk1178]

Hi,

Thanks for your response. I would like to post the 1098-T exactly as is but turbo tax is asking me for the ‘taxable scholarship amount’. 

I think I understand now, thank you for your help!

[Carl · Accepted solution]

On the 1098-T, if box 5 exceeds box 1 ***AND*** the school sent the student a check for the difference, then it's taxable income to the student.

If the school did not send a check to the student for the difference, then that means the school held the excess scholarship to apply to 2020 qualified expenses. In that case, the excess is *not* taxable income to the student. You just indicate on the return (where it asks) that some of the scholarship was/is applied to the next calendar year expenses. Then the program will ask for the amount of excess that gets 'carried over" to 2020. You enter that amount, and it's not taxed.

If this is your case, then it's up to *YOU* to remember this when you file your 2020 taxes next year. That's because the scholarship carry over amount will *NOT* be included in box 5 of the 2020 form 1098-T, but it *will* be included in box 1 of the 2020 form 1098-T.