Our son received two scholarships from his university. His scholarships exceeded his tuition. He is reporting the excess amount on his 1040EZ line 1. We are now working on the parent tax form. We enter the amount from his 1098T and come to a question that asks if part of his scholarship on the 1098-T includes amounts already reported as income on his tax return. However, under the question the choices are “Yes, he had scholarship or other aid reported on a Form W-2 or Form 1099-MISC” or “No, he didn’t have any scholarship or other aid reported on a Form W-2 or Form 1099-MISC”. How should this question be answered? It was indeed reported as income on his tax form but the scholarship came directly from the school and was not on a Form W-2 of 1099-MISC.
Wow! Had to read that a few times before I got it. 🙂
College Education Expenses
Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:
- Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*
- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.
Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.
Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”. The first one indicates a choice. The second one provides no choice.
If the student:
Is under the age of 24 on Dec 31 of the tax year and:
Is enrolled in an undergraduate program at an accredited institution and:
Is enrolled as at least a half time student for one academic semester that begins during the tax year, (each institution has their own definition of a half time student) and:
the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)
Then:
The parents will claim the student as a dependent on the parent's tax return and:
The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:
The parents will claim all educational tax credits that qualify.
If the student will be filing a tax return and:
The parents qualify to claim the student as a dependent, then:
The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.
Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.) Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.
In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.
If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6200, then the student doesn’t even need to file a tax return, and nothing has to be reported.
If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.
Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6200, then the student should file a tax return so as to get those withheld taxes refunded.
Unfortunately, this does not answer our question. We must report the 1098-T form as part of the parent tax return, as a 529 account is being used to pay for the remaining college expense. The question was specifically how to answer the specified question that comes up in TurboTax. The scholarships exceed the qualified expenses. Again, the TurboTax question asks if part of his scholarship on the 1098-T includes amounts already reported as income on his tax return. However, under the question the choices are “Yes, he had scholarship or other aid reported on a Form W-2 or Form 1099-MISC” or “No, he didn’t have any scholarship or other aid reported on a Form W-2 or Form 1099-MISC”. It is required to be reported as income on his tax form (1040EZ, line 1), but the exceedance amount is not specifically on a Form W-2 of 1099-MISC.
Aye, you didn't mention the 529, and that's got me wondering too. Let me get someone else to jump in here. I can see the problem since the 529 specifies the student as the beneficiary on the 1099-Q. But I would "expect" that would be reported separately by the parents only, and the parents would report only the 529 income/expense since the parents claim the student as a dependent. But again, let me get someone else to see if that's right, or what.
The writer above says "If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits." Is anyone but me finding this not to be true in filing for 2016? Even though scholarships exceed qualified expenses , Turbotax is granting me an American Opportunity credit when I enter my the 1098T for my daughter. Is this an error?
Hi .. I wanted to let you know I have been doing research on this issue today. I have reached out to one of my managers here who can shed some light on this situation. I am waiting to hear back as he is off site currently. You can also consult with a tax professional as well which may end up being the end result, I am not for certain yet. The info that Carl provided is correct but since there are varying scenarios we want to provide you with the most accurate info. My apologies for the delay. I will get back as soon as I hear back.
Both Carl and Hal_Al have posted correct info regarding your issue. This was from Hal_Al...For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the 1099-Q can be either the owner or the beneficiary depending on where the money was sent. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient".
The 1099-Q gets reported on the recipient's return. The recipient's name & SSN will be on the 1099-Q.".. at this point I am going to refer you to our TurboTax PersonalPro team they can give you the tax advice you need in this situation. https://pro.turbotax.intuit.com/
No one is answering this for her. Canned answers are not helpful. I am confused by the same thing. I think there is a huge mistake in how turbo tax words the question. You can absolutely add the excess tuition in the defendant's return so that the taxes can be paid there and this allows the parents to a obtain better credit if that excess money has already been taxed. I think Turbo tax just needs to say "Yes, he had scholarship or other aid reported on a Form W-2 or Form 1099-MISC or in their income Line 1(or whatever line for their tax form) as a result of excess scholarship money." Turbo Tax also gives zero info on if student enters their 1098-T info on their own return, if the excess scholarship automatically gets added to their income and if the words SCH get added also to the line like it is supposed to. But to the OPs question, YOU WOULD HAVE TO answer yes there to get the credit you are looking for because Turbo Tax does not go on to ask you any more questions about that. Plus, I tried it both ways. If you answer no just because you did not get a W-2 or Form 1099-MISC does not mean you cannot do it. Just another mistake in the wording I believe.
Hey great info!
Can you please help with this. My daughter got more scholarship income than her tuition, but all of the scholarship income went straight to the school and then they issued checks to her for the extra that was not used for tuition. That being said, we would not be able to claim all of the scholarship money as income and then claim the AOTC would we? Given that the scholarship money was actually paid to the school and then the remainder was issued to her? It appears that we would no be able to claim the AOTC at all and then we would have to show the extra scholarship income that she received as income that is table on her return?
Thanks in advance for any guidance on this.
"It appears that we would not be able to claim the AOTC ..... and then we would have to show the extra scholarship income that she received as income that is taxable on her return"?
That's generally correct; but there is a loop hole* available.
The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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 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 nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.
You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.
Enter the 1098-T, exactly as received, on the student's return. In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.
Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is to enter $4000 less than the actual box 1 amount, when you enter the 1098-T on the student's return or $4000 more in the box 5 amount.
* From the 2019 form 1040 instructions (pg 95): “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040, line 18c, and IRS.gov/EdCredit. Page 16 of PUB 970 (2019) actually has examples of how to do the “loop hole”.
My daughter got more scholarship income than her tuition, but all of the scholarship income went straight to the school and then they issued checks to her for the extra that was not used for tuition.
You the parent will claim your daughter as a dependent on your (the parent's) tax return. That's it. You the parent will not claim or report anything concerning education on your (the parent's) tax return.
Nobody will qualify for "ANY" education credits or deductions of any type, in any way, shape form or fashion.
Your daughter will report "ALL" the education stuff on her own return, only if she is actually required to file a tax return. She is required to file a tax return if any one or more of the below three conditions are met.
- If your daughter has more than $1,050 of investment income, then she is required to file a tax return and report all income from all sources. That includes the scholarship money, meaning that your daughter will deal with it all in the education section of her own return.
- If your daughter has more than $400 of self employment income, then she is required to file a tax return and report all income from all sources. That includes the scholarship money, meaning that your daughter will deal with it all in the education section of her own return.
- If your daughter has W-2 income. Add that W-2 income reported in box 1 of the W-2 to the amount of the physical checks she received from the school. If the total exceeds $12,300, then she is required to file a tax return and report all income from all sources. That includes the scholarship money, meaning that your daughter will deal with it all in the education section of her own return.
If your daughter is required to file a tax return, then she will be taxed on the excess scholarship money that she was paid in 2019, and "that" money will be taxed at the parent's higher tax rate. So she will be contacting you for information from your own tax return which you will need to provide her.
Thanks Hal_Al,
Do you know how the kiddie tax on form 8615 plays into this scenario? As I understand it, the taxable scholarship funds that she includes as income on her return would be taxed via form 8615?
Thanks.
@tonybeo - Yes scholarship income is subject to the kiddie tax, but it has a "dual status". It is not earned income for purposes of the kiddie tax, but is earned income for purposes of the dependent's standard deduction calculation. So, the first $12,200 is not taxed.
Sorry here is link referred to in previous post.
https://www.journalofaccountancy.com/issues/2019/mar/education-tax-credits.html
And one more link that may help clarify:
https://www.irs.gov/pub/irs-utl/Pell%20AOTC%204%20pager.pdf
@tonybeo Your link to journalinfoaccountancy.com really holds no legal weight, because it's not an official IRS website. It's the interpretation of the IRS regs by a non-IRS individual or entity. Whereas the link to the IRS website does hold weight. In fact, it holds all the weight.
In a nutshell, either way you go doesn't matter to the IRS. But it could matter to you. You just have to pick the way that is more beneficial to you. If you get more money with a tax credit, than what you pay in taxes by declaring it used for non-qualified education expenses, then go that way.
Otherwise, if you pay less in taxes by declaring it for qualified expenses, then go that way. Either way, the IRS gets their cut and you get your tax break. It's just a matter of selecting the best option for you.
Of course, if the student qualifies to be claimed as a dependent on the parent's tax return, that's the parent's choice. The student has no choice really.
Glad to have that IRS link now, because it explains it in plain english without all that IRS tax speak gobble-de-gook.
Hal_Al,
Thanks again for this info. So the 1098-T would be entered on both the parent and the child's return? I thought it was only entered on the parents return?
Thanks, So you are saying that if total income (with scholarship income and W-2 income for child) is less than 12,200, then there will be no income tax on that due to the standard deduction but there will be a calculated kiddie tax based on the unearned scholarship income that was added to her W-2?
Thanks.
Hal_AL,
Can you comment on how adding taxable scholarship income to a child's return would affect the premium tax credit on my return? That form asks for the MAGI of the parents and the child. Would that taxable scholarship income be included in her income for the purposes of that form? If so, it would change the total family MAGI that was projected for 2019 and result in us having to pay back some of that credit.
Thanks.
Can you comment on how adding taxable scholarship income to a child's return would affect the premium tax credit on my return?
Here's what I know, and it may not be all inclusive.
First, I assume you have a college student that qualifies as your dependent, and you are "in fact" claiming them as your dependent on your tax return, as you should.
I assume that the total amount of scholarships, grants and any 529 distributions received in 2019, exceed the qualified education expenses paid with that income received from a 3rd party source.
If my assumptions are correct, then you the parent's will still claim the student as your dependent, and you the parents will *NOT* report one single thing concerning education on your tax return.
The student will report all the education stuff on the student's own return *IF REQUIRED*. It is required for the student to do this *IF* the total of the student's earned income (W-2, 1099-MISC, self-employed) plus the student's investment income (1099-INT, 1099-DIV, etc) plus the students taxable portion of all scholarships, grants, 529 distributions exceeds $12,300.
It is also required if the student's investment income alone exceeds $1,050.
So my first question to you is, is the student required to file a tax return?
Thanks.
She had 16,501 of total income but 9,799 of that was from the taxable scholarship. We were looking at 2 scenarios to see which one was the best situation. She supported herself a good bit so we could either claim her as a dependent or not. One option is we claim her as a dependent and we claim the 1098-T on our return the other option is she claims herself and the 1098-T on her return.
If we claim her as a dependent, don't we have to claim the AOTC on our return? Or are you saying that we cannot claim her as a dependent if her income if over a certain amount?
Thanks.
She had 16,501 of total income but 9,799 of that was from the taxable scholarship.
There's no way possible that the student provided more than half of their own support. There are only two possible ways the student can have a valid claim to providing more than half of their own support for the entire year.
- The student had a W-2 job or was self-employed, and the "EARNED" income exceeds half of their "support" expenses. In your case, there's no way the student's $6.702 of earned income was enough to provide more than half of her own support. So with that, she qualifies as your dependent.
- The student was the *PRIMARY* borrower on *qualified* student loans, and a sufficient amount of that borrowed money was distributed to the student in the tax year, to cover more than 50% of their support.
So in your case, the student does not have a choice here and "MUST" select the option for "I can be claimed on someone else's return". But you the parent do have a choice to claim the student or not. But it doesn't matter if you don't claim the student as your dependent. The student has no choice and must select the option to indicate they can be claimed on someone else's tax return. Period.
So from the numbers provided, is $9,799 the taxable "portion" of the total scholarship received? Or is it the total scholarship received? I asked, because all scholarship/grant money received is treated as taxable income "initially". It's taxability is offset by the qualified education expenses they are used to pay for.
I know you're initial question is about the healthcare stuff, and I've not forgot that. I just need to help you work out if you are going to claim 100% of the premium tax credit, or if you have to pay back that percentage of the credit that applies to your student, and your student get's the credit for that on their own tax return. The first order of business to that end, is to determine if the student is "required" to file a tax return.
If $9,799 is the total amount of all scholarships, grants, 529 distributions received by the student, and that total exceeds the total of all qualified education expenses, then it "sounds" to me like this could go either way on the student's tax filing requirement.
I'm trying to make sure without a doubt, that I have the entire picture here. That premium tax credit thing can be tricky. So we have to "know" we have this right. I can't be guessing here.
I just realized I"ve been going around my elbow to get to my thumb. Lets stop that and give you the two basic scenarios.
If the student is "NOT" required to file a tax return and the student *WILL NOT* be filing a tax return, then the parents will claim 100% of the 1095-A for the PTC. Period. End of story.
If the student *is* required to file a tax return, or if the student is not required to file at tax return but *WILL* file a tax return for the sole purpose of getting with held taxes refunded to them, then the student "MUST" include their percentage portion of the 1098-A on their tax return. Here's how it works.
Lets assume there are only 3 people covered on your Marketplace policy. You, your spouse, and your student. That means that each of you individually is entitled to 1/3 (33%) of the PTC.
YOu will file your joint tax return claiming 66% of the policy. That means you only get 66% of the PTC. So you'll have to "pay back" 34% of it. (Totals *must* come out to 100%, so that's why "someone* gets 34%)
The student will also file the same exact 1095-A claiming 34% of the PTC. That 34% will be added to the student's refund (or reduce their tax liability accordingly.)
So you will need to provide your student a copy of that 1095-A.
Whew! Does that clarify and answer your base question now?
Thanks Carl,
She had 11298 in tuition and 814 in books and 17911 in scholarships. So total QEE's are 11298 + 814 = 12112. Subtract that from 17911 to get 5799 of scholarships above QEE's. Then add 4000 of the scholarships (to be applied to living expenses) to the 5799 to get 9799 of taxable income.
Thanks