How to report qualified education expenses on both my daughter and my return

[Queennaomi]

I have read a lot of similar situations in this community posts however I'm still a little confused.

Received 1098 T with box 1  $31,000 and box 5   $42,000

Paid out of pocket for books and materials: Bought from the school $800

                                                                               Bought not from school  $ 1,000

I reported the 1098 T on my daughter's return and TurboTax calculated the taxable scholarship

$11,000 and showed it on Schedule 1 on line 8r

On my return, I reported the $ 1,800 out-of-pocket qualified education expenses and got some AOTC.

Question: Is the $1,800 out-of-pocket qualified expenses need to be deducted from my daughters

return?    $11,000 - $1,800 = 9,200. Instead of 11,000 should  it be $9,200

If the $1,800 need to be reported on my daughters return then do I need to remove that amount from my return?

1. Do I need to reduce the taxable shcolarchip by $1,800 on my daugthers return

2. If so where do I show that amount on my daughters return

3. Do I need to remove the $1,800 from my return

Thank you!

[Bsch4477]

Did your student have any other income apart from the scholarship and if so how much and what source?

[Queennaomi]

She got a W2 for $10,250

[Hal_Al]

Q. Does the $1,800 out-of-pocket qualified expenses need to be deducted from my daughters

return?

A. No.  You've essentially done it right, but there are some options.

The best option is for you to use some of the box 1 amount to claim more of the AOTC.  You need $4000 total expenses to get the maximum $2500 AOTC. The first $2000 of expenses gets you 100% credit. The next $2000 gets you 25%.  

For you to claim $4000 total expenses (including $2200 of tuition from box 1 of the 1098-T), your daughter will need to report $13, 200 of taxable scholarship (instead of only $11,000).   

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, up to $13,850).  It is not earned income for the kiddie tax and other purposes (e.g. EIC ).  

Q.  Do I need to reduce the taxable scholarships by $1,800 on my daughters return.

A. No, you do not "need to" (have to). But, it is an option. 

Q. If so where do I show that amount on my daughters return?

A. After entering the 1098-T, there is a follow up question about other expenses. 

Q.  Do I need to remove the $1,800 from my return.

A. Yes, but only if you use it as an expenses on her return. As previously stated, it is usually better if the parent claims educational expenses on their return. 

Another issue:

Q. Can your daughter claim  the AOTC on her return?

A. Usually not. But In your/her case, yes, because she has a tax liability.  But it's most likely best if you claim it instead. 

While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out.  A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)

[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 your example: Student has $42,000 in box 5 of the 1098-T and $31,000 in box 1. At first glance she has $11,000 of taxable income and nobody can claim the American opportunity credit. But if she reports $15,000 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 $1800 in expenses for those course materials, paid out of pocket, she would only need to report $13,200 of taxable scholarship income, instead of $15,000.

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”.

[Bsch4477]

To accomplish what @Hal_Al correctly suggested do this. 
 Remember that the 1098-T is an informational form so you c

a report values that differ from those that you see on the form. In the student’s return in the 1098-T form in the program enter 32800 in Box 1 which represents total qualified education expenses. In Box 5 enter 46000 which accounts for the increase in the student’s taxable scholarship amount. Look on line 8 of her 1040 and you should see the 13200 of taxable income mentioned by Hal_Al. Be sure that you checked the box on her return saying that someone else will claim her. 

Now on your return in the education credit section just enter 4000 as expenses. You don’t have to do anything else and you should see your 2500 credit. Note that on her return there will be Kiddie tax which needs information from your return to complete. 

[Queennaomi · Accepted solution]

@Bsch4477 I did exactly what you suggested and got $1500 non-refundable and $1000 refundable education credit. Also, my daughter had to pay kiddie taxes based on the information on my return.  I was stuck on I needed to report exactly what is on 1098-T, now I understand the 1098-T form is for informational purposes and we can report different numbers from those that I see on the form.   Thank you both ( @Bsch4477 )for the help and a clear explanation of the points that I needed to understand.  

[Pinay0637]

You mentioned this on your response, "Note that on her return there will be Kiddie tax which needs information from your return to complete." Is the Kiddie Tax on my child's return or parent? Thank you so much for your help and the helpful information you have shared.

[Pinay0637]

@Bsch4477  Is the Kiddie tax on the child's return or parent? I do not see on my daughter's return. You

By the way @Bsch4477  & @Hal_Al Thank you so much all the  helpful information you both have shared.

[Bsch4477]

It can be either. See below. 

https://ttlc.intuit.com/turbotax-support/en-us/help-article/taxation/report-pay-kiddie-tax-return-ye...

[Hal_Al]

Q.  Is the Kiddie tax on the child's return or parent? 

A.  In this situation (the child has taxable scholarship income), it goes on the child's return, using form 8615*.  

Because scholarship income is earned income, for purposes of the dependent's standard deduction, the kiddie tax will not kick in until he has more than $15,100 of income ($13850 +1250) for 2023. 

*If his only income is from interest and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV, there is a provision for entering it on your return, using form 8814. 

[pinay_0637]

@Hal_Al  & @Bsch4477  Thank you both! 

My daughter is my dependent. She has "Taxable Scholarship Income" of $10,543 (Box 5 exceeds Box 1 that comprise Room&Board Scholarship + Federal Pell Grant).

This is all the income she has form 2023. Is she required to file her own return?

I might consider claiming  the Education Credit. I think I understand the previous chats on how to do this part on her  daughter's return (if she has to file) and my mine.

Also, my daughter is on my 1095-A. So if she files her return, I will have to declare her MAGI. This means I have to payback a considerable amount of  Premium Tax Credit. It's my first time dealing with 1098T and not aware that room&board scholarship are taxable income. Ugh!

[pinay_0637]

@Hal_Al & @Bsch4477  Sorry I hit the post too soon before I can ask this question. Can I just enter $4,000 on Education Expense to get the Education Credit w/o my daughter filing her tax return? I want to do this right without getting in trouble as far as filing my daughter's return if needed and as 1095-A is concern. Thank you again for your help!

[Hal_Al]

Q. Can I just enter $4,000 on Education Expense to get the Education Credit w/o my daughter filing her tax return?

A. Yes.

Q.  My daughter is my dependent and has "Taxable Scholarship Income" of $10,543 for 2023.  Is she required to file her own return?

A.  No. Her income is below the $13,850 filing requirement. But, you may want to have her file to document the fact that she is treating the scholarship as taxable income.

A dependent must file a tax return if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $14,600 ($13,850 for2023).
2.          Unearned income (interest, dividends, capital gains, unemployment, taxable portion of 529 distribution) of more than $1300 ($1250 for 2023). 
3.          Unearned income over $450 and gross income of more than $1300.
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2600 ($4,600 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

[Bsch4477]

As @Hal_Al posted, your dependent doesn’t have a filing requirement if that was her only taxable income so you don’t have to report that income for premium tax credit calculation.