How to report 1098T and 1099Q

[NathanSchraeder]

I am a freshman at college and got to school full time. I did work in the summer some and have $1650 in wages on my W-2. My parents are trying to get the education tax credit and I am trying to figure out if I need to file taxes as their dependent to help with that? I have read a few things about putting some of the scholarship money on my taxes so they can claim the credit. Here are the details...

My 1098T shows $16,838 for scholarships in Box 5 and $16,141 for qualified expenses in Box 1. My room and board was 4,256 (which I know isn't part of qualified expenses). The total bill for the fall was $20,577 (qualified exp. plus an athletic insurance fee and room and board). So after scholarships I still owed the school $3,789 which was paid directly to the school from my 529 plan. All of my bill was covered with nothing left over. However, my 1009 Q shows $7,459 in box 1 so it seems its showing distributions for fall and spring semester (paid in December) where as the 1098 is only showing expenses paid for fall semester so it looks like I got more money distributed, therefore it is taxable? Box 2 is $2959 and box 3 is $4500. So my question is what is the best way to enter this 1098 and 1099 info between my parents and I to get the education credit? I have read a lot of threads and just want to figure out the best way to report and do I have to report the numbers exactly as are on those forms? Thanks!

[Hal_Al]

You have $20,577 of Qualified educational expenses (QEE). If your parents use $4000 of Tuition to claim the education credit, that leaves $16, 577 adjusted QEE  (AQEE) for the Scholarship and 1099-Q.  That's not enough, something has to be taxable.  Note: R &B is qualified only for the 1099-Q, not scholarships or the credit. 

In your case, it's fairly easy,  since you have little other income. You report some of your scholarship as taxable.

$16,838 + 7549 = $24387.  $24,387 - 16,577 = $7810 Taxable amount of Scholarship.

So, why is reporting $7810 scholarship, as taxable,  better than reporting $2959 of 529 earnings? Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400).  Nothing ends up being taxed. 529 earnings are unearned income.  You get a smaller standard deduction and have to pay tax. 

Also, $2959 is not enough, so a little bit of scholarship would still be taxable (or the parents would have to accept a reduced credit).

Technically, you do not even need to file a tax return (total earned income is less than $12,950). But, you may want to do so to document the reporting of the scholarship as income. Or you may need to file to get a refund of withholding from your job. 

TurboTax can theoretically handle all this, but it can get messy, It's best to use  workarounds. Don't enter the 1099-Q, at all, it's fully covered by AQEE.  On the parent's return enter the 1098-T with $4000 in box 1 and box 5 blank. Enter no other numbers.

On the student's return, enter the 1098-T with box 1 blank and $7810 in box 5. Enter no other numbers. 

A side issue: You must time your 529 distributions to your QEE. That is, you cannot take a distribution in December to pay January bills for the following year.  In your case, the numbers worked out, because you were able to shift scholarship to taxable. 

From Pub 970 (page 60: "To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses'. 

[KrisD15]

Yes, you need to be a dependent in order for your parents to apply for an education credit. 

If you did not supply more than half your own support (and making 1,650 sounds like you did not support yourself) you would most likely would be a dependent. 

It is possible that the distribution crossed calendar years, but you need to know exactly what amounts were used for 2022 and what you'll need to adjust for 2023. 

Room and Board cannot be used towards a credit, so it's best to allocate the Room and Board to the distribution. 

Use your school account and statements to track the distribution. 

If the distribution was 7,459 and Room and Board was 4,256, where did (or where will ) the other 3,203 go? If to Room and Board in 2023, you can leave the 1099-Q off the returns and not claim the room and board. 

What about expenses for books and supplies? 

Insurance fees are not eligible expenses. 

So I see 16,141 Tuition and 16838 Scholarship, but that should be adjusted slightly for books and supplies. 

Your parents SHOUD get the best credit by claiming 4,000 expenses. (There are also income limits, so if they are high earners, make sure they are eligible for the credit before you claim income) 

Claim taxable scholarship so that your parents can claim 4,000in expenses. 

If you need to claim 697 (16,838 - 16,141) just to break even, you would need to claim 4,697 to give your folks that 4,000 they need. 

On your return, just enter 4,697 (or whatever your calculation comes out to) in the Education Section.

Have your parents claim 4,000 expenses on the 1098-T screen on their return. 

Note: The additional answer above is covering the distribution as well, which I pointed out needs to be reconciled one way or another.  

I did not feel I had enough information to make a decision on the distribution. 

See Pub 970 for more information 

@NathanSchraeder