How much of scholarships do you want to allocate to "room and board and noneducational expenses?"

[MidMoMom24]

Hello,

I am filing our taxes (married filing jointly with dependent college freshman, that's 19 years old - not required to file taxes as he only earned $1,007 with a summer job) and I am stuck on this question:

"How much of the $21,300.00 you received in Pell grants and scholarships do you want to allocate to room and board or other noneducational expenses?"

Here is the info I entered so far into each of the questions asked:

I filed my 1098-T form with box 1 = $18,839.88 (tuition) and box 5 = $20,300.00 (scholarships)

Did I pay for books or materials for school? YES

Cost of books and materials that you had to buy directly from the school: $85

Cost of books and materials that you didn't have to buy directly from the school: $429.19

Your 1098-T reported $20,300 in scholarships or grants. Did you receive any other scholarships or grants not reported on a 1098-T? YES

Enter the total amount of other Pell grants, scholarships, and fellowship grants you received for educational expenses paid: $1,000 (scholarship)

Do you want to allocate part of your Pell grants or scholarships to room and board or other noneducational expenses such as travel, research, or certain equipment? YES

How much of the $21,300 you received in Pell grants and scholarships do you want to allocate to room and board or other noneducational expenses? ????

***How do you figure this number? Or do I need to answer "No" above?

Also, I am confused about whatever number we enter in the Box in question, it says "If you enter an amount here, be sure to include it as income on Student's tax return" - does this now mean we need to file a tax return for our student as well? Or that depends on the amount entered? I believe $1,250 is the max of unearned income allowed before they would need to file taxes, is this accurate? And would it even be worth it if we need pay taxes on whatever amount this is?

I am trying to get the refund owed to us, not anything extra or unusual, I am just not sure the best way to answer this question and be accurate.

Please help if you can, I am about frazzled with this and no tax offices are taking new clients before the deadline. Thank you in advance.

More info about us:

I am married filing jointly (less than $160,000 annual income)

College student is 19 and only worked a summer job, we are claiming as a dependent.

All money received was scholarship money, no pell grants.

Actual cost of health fee, room & board: $4,944 (I know room and board aren't included in QEE I'm just trying to figure out exactly what amount to use here to get accurate results. 

After all scholarships, we wrote a check to the university for $2,484 to cover the remaining room & board expenses.

[Hal_Al]

  There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), 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.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.

In the 2nd example, you tell TT that you want $5000 of the scholarship to be allocated to Room and Board. 

In your case, since student only has $1007 of other income, the additional $6974 (quick calculation) of taxable scholarship is not enough to generate a tax liability. He does not even need to file. 

Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.

The IRS actually encourages use of this technique. From the form 1040 instructions: “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 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.

[MidMoMom24]

Thank you. 

$16,950 of the scholarship money was issued strictly for tuition use only. Would that change things here?

[Hal_Al]

Q. $16,950 of the scholarship money was issued strictly for tuition use only. Would that change things here?

A. Yes. $18,840 - 16,950 = $1890  of the tuition can be used to claim the American Opportunity credit (AOTC).  $1890 + $514 of other expenses = $2404 of net qualified expenses. That is still enough to get you $2101 of the maximum $2500 AOTC. 

[MidMoMom24]

Ok. So does that mean I enter the $1890 for the question asking "how much do you want to allocate for room and board"? 

Or this is entered elsewhere?

And then do I need file taxes for my student separately also? As the $1890 would be more than the $1250 unearned income allowed, is that correct? Even tho my students earned income was only $1,007.

Or I don't use the $1890 to decide if my student needs to file, I use the $2,460 (difference between scholarships received and qualified tuition amounts on the 1098-T). I'm confused by this part.

Sorry for all the questions, just want to make sure I don't mess this up. 

[Hal_Al]

Enter $4350 as the amount of scholarship for room & board. 

The math:

Remaining Expenses: $18,840 - 16,950 = $1890 + 514 = $2404

Remaining Scholarship: $$21,300 - $16,950 = $4350

By allocating all the remaining scholarship for R&B, it frees up all the remaining expenses for the AOTC. 

[MidMoMom24]

Ok.  Yes, that makes sense. Thank you!

Now what about my students taxes? They wud need to file now, is that right? Due to part of scholarships being used for R&B (not a QEE). 

That adds $4350 to their income, as unearned income correct? (Over the $1250 limit) Since it's excess scholarship money being used for non QEE. Or am I not understanding that part right?

[Hal_Al]

Q. Do I need file taxes for my student separately also? 

A. No. 

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400). The $1250 threshold does not apply. 

It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For undergrads, it is not earned income ("compensation") for IRA contributions. 

[MidMoMom24]

Awesome! That's good to know. This makes sense now. Thank you again for all your help. 

[MidMoMom24]

@Hal_Al 

After going thru all my documents and double checking receipts (to have accurate amounts).

I wanted to ask about laptop purchase, we did buy him a laptop for college. I saw you listed computers up in one of your previous answers, should we add his laptop cost ($1,025) to answer the question "books, materials and equipment purchased that you didn't have to buy directly from the school"?

That would make it: $1527, instead of just $502 

($1025 laptop +  $502 books = $1527)

$96 graphic calculator (wud this count too?)

Thank you. 

[Vanessa A]

Yes, if the laptop was a requirement for school, you would include it as equipment not purchased from the school. 

[MidMoMom24]

Thank you Vanessa.

Would the calculator count then as well?

And do I need to reduce the amount allocated to R&B if I add the laptop/calc?

Or its fine to leave the allocated amount as is?

[Vanessa A]

Yes, a calculator would count as well.

If you are trying to claim the AOTC, having expenses greater than $4,000 will not make a difference in the credit.  The credit is calculated with the first $2,000 of qualified expenses 100% eligible for the credit with the next $2,000 eligible at 25% for a total of $2,500.  

Yes, you would reallocate the amount for room and board.  The reason to remove from Room and board would be to lower the taxable scholarship amount. 

[MidMoMom24]

@Vanessa A ,

When I go in and try to reduce the R&B allocation, it completely reduces my AOC down by almost $2,000. So I feel like I have made a mistake somewhere...but not exactly sure where?

Do I need to enter the $1,890 remaining tuition amount that Hal_AI mentions above along with the "other expenses" together in the same box? (I have gone back up thru the thread and reread it a few times and I think I made a mistake somewhere there.

Currently I have: 
$18,840 - $16,950 = $1890

$1890 balance left of tuition to claim AOTC

$1,025 laptop

+$96 Ti 84 plus calculator 

+$417 books (textbooks & reading books)

=$1538 of books & equipment

But I have not entered the $1890 into the program anywhere...so I think that is mistake, is this right?
I need to add the $1890 tuition balance to the $1538 qualified books & equipment which gives me $3428 Net Qualified expenses to enter in the one box. And the boxes are not labeled in a way I can enter the remaining tuition balance, so I am not exactly sure where to enter that $1890?

I feel so close... 😬

[MidMoMom24]

@Hal_Al 
If you have a minute, I am a bit stuck on where to enter in the $1890 of the remaining tuition in the form you helped me with yesterday? 

I have two questions asking:

Cost of books and materials that you had to buy directly from the school: Ans: $85 (book from univ bookstore)

Cost of  books and material that you didn't have to buy directly from the school Ans: $1538 (books, laptop, calculator)

So I am unsure where that $1890 gets entered? Or what line of the 8863 it should appear? (I can try to narrow it down on how to enter it if I know where to look on the form 8863.