I reported a 1098-T and it is raising my taxable income. was all scholarship money, excess was used for books and transportation. Can I remove the 1098-T from my return?

[awilzz12]

It brought my taxable income up by a lot but this money was granted by a scholarship and I was never told it would be taxable, nor that I would have to pay it back. Will I get fined or in trouble if I delete the 1098-T i already filed with my amended returns? I can’t afford to pay for these taxes if i’m not even supposed to be taxed on them.

[KrisD15]

What do you mean by transportation?

Scholarships used for Tuition, Fees, Books and Supplies are not taxable, but "Transportation" is not normally considered an Education Expense. 

[Hal_Al]

Q. Can I get  in trouble if I delete the 1098-T?

A. Yes, if your income is high enough to have a tax liability. 

Scholarships that paid for non qualified expenses are taxable. Tuition, fees, books and computers are qualified expenses.  If box 5 of your 1098-T is more than box 1, TurboTax will automatically treat the difference as taxable scholarship income unless you tell it differently (enter additional expenses). Room & board and transportation are not qualified expenses.

There is a tax “loop hole” available. 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.

[tbennett0531]

Can you help me with the loop hole? My son made $4200 from two jobs but also has a 1098-T. This claims he had taxable income too. BOX 5: 36,867.38 and Box 1: 17,736.38. It’s saying he will

owe almost $1500 in taxes. How can we do this on our form so he doesn’t have pay in? I can claim him , he turned 18 in November. 

[Hal_Al]

Q. How can we do this on our form so he doesn’t have pay in? 

A. That cannot be done.  He has to file that on his own tax return, Him owing tax is the correct outcome. 

But, there is a better outcome for the family.  He pays a little more tax, but you get (up to) $2500 from a tuition credit. See "loop hole" explanation above. 

[jaybird84]

I don't mean to sound like a complete idiot but this is the first time that I've heard of this and this is the first year that I'm really stuck on taxes as my daughter got far more scholarships this year and it appears that it's going to hurt her more then help her. Box 5 is 25868.00 and box one is $16893.00. It sounds like she really came out ahead but the money was used for off campus housing. Are you able to explain this loop hole to an uneducated single mom who is most defiantly  confused and needs the best tax outcome. 

[DawnC]

Families may be able to increase their total refund or reduce tax liability by paying some tax on their scholarships and increasing their tax credit.  Students may choose whether to treat their scholarships as used for tuition and related fees (tax-free, but reduces expenses for credits) or as used for living expenses (taxable, but does not reduce expenses for credits).  From The Interaction of Scholarships and Tax Credits.   It is from 2014, but still valid and useful today.  @jaybird84 

You can split up the income and expenses (qualified and non-qualified) between your two returns.   The IRS encourages this to maximize the education credits.    See Examples for Pub 970 (2024).

Students may allocate scholarships to living expenses (up to the amount of actual living expenses).  Students exercise their choice by deciding how much of their grant or scholarship income to exclude from their income, and what expenses to claim for the AOTC or LLC.   See the last few slides of the IRS 2014 Slide Show for examples for each possible situation.  

[Hal_Al]

 Student has $25,868 in box 5 of the 1098-T and $16893 in box 1. At first glance she has $8975 of taxable income and nobody can claim the American opportunity credit. But if she reports $12,975 as income on her return, the parents can claim $4000 of qualified expenses on their return.  

So you get a $2500 tax credit and if that is her only income, she pays no tax, because the amount is less than $14,600.*  Books and computers are also qualifying expenses for the AOC. So, the amount of reportable scholarship could be reduced further.

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. The 1098-T that you enter in TT is not sent to the IRS.

Enter the 1098-T, exactly as received, on the student's return. Enter book and computer expenses separately.  In her interview, you should eventually reach a screen called "Amount used to calculate education credit" (or similar wording).  Be sure the amount in that box is $4000. That will put all her excess scholarship as income on her return (line 8r of Schedule 1).

Be advised some people are saying they're not getting the "Amount used to claim the tuition credit" (or “Education Expenses used for a Tax Credit”) screen on the dependent’s interview.  Check the student information work sheet (part VI, line 17) to verify it was entered.  If not, the alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T.

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship ($12,975) and enter the 1098-T, on her return, with 0 in box 1 and the  taxable amount  in box 5. In that case the amount in the  "Amount used to claim the tuition  credit" box is 0 (if it comes up and it shouldn't).

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  

[jaybird84]

She did have income ( $12885.64) as well because she was working. I'm going to attempt to follow instructions that you both have replied back. 

Does it make a difference that one of the scholarships she got, she could use it on qualified or nonqualified expenses?

[Hal_Al]

"She did have income ( $12885.64) as well because she was working."  She's looking at about $480 more in tax in order for you to get the $2500 credit. The "kiddie tax" will apply because of the hybrid nature of scholarship income.  But, that was already gonna happen. 

Q. Does it make a difference that one of the scholarships she got, she could use it on qualified or nonqualified expenses?

A. Yes. That's what makes it acceptable to use the loop hole.  You are not allowed to switch "restricted" scholarships to taxable income.  

[jaybird84]

If I go the version of turbo tax where you pay extra to have a live agent, will they do this work around? I'm worried that I'm going to completely mess this up. 

[SusanY1]

Yes, TurboTax Live can assist with this.  

However, if you prefer to try it yourself Hal_Al has helped many TurboTax customers walk through just this sort of thing on their own and I am confident you can also find the help you need to get this properly entered here.  (And if Hal_Al isn't available, any number of other folks can likely also assist.)

[Hal_Al]

Once we calculate the expected outcome, there's are simple workarounds for entering it in TurboTax  to get it to show that outcome*. 

How much of the scholarship can be used it on qualified or nonqualified expenses?  Do you know for sure that the rest is restricted (must be used for tuition)?  How much other expenses does she have for books and a computer?

* Manually calculate the taxable amount of scholarship  and enter the 1098-T, on her return, with 0 in box 1 and the  taxable amount  in box 5. On your return, enter $4000 in box 1 and 0 in box 5. Enter no other numbers. 

[jaybird84]

Ok so here goes- 

Total scholarships/ grants ( Box 5 on 1098 T) = $25868.00 of that we know $5,000 was able to be spent on whatever but the remaining $20868.00 was government Grants/ scholarships so we don't know how we will be able to tell if they were able to be used on nonqualifying or not. 

She has $2236.15 in other expenses. 

$4500 was spent on housing for second semester and $6022 was used for housing with a loan for first semester. I know we can claim the interest on the loan in another section. But I can't add the loan itself correct?

Total tuition was $16893.00. 

I'm going to attempt to do them now and double check what you tell me to see if I'm doing it right. I get so nervous I'm going to do it wrong ha! 

[AmyC]

Correct, the loan will not be added, only the interest under the student loan interest section.

As for the scholarships, look through the paperwork when granted to see what stipulations there are. Since the amount is greater than tuition, more than $5,000 of it has to have been allowed for room and board and other things. Smart kids get paid to go to college and the tax on the scholarship is much better than paying for college.

You only need $4,000 of tuition for you, if you qualify for the credit.

1. Check to see if you qualify for any college credits. Currently:
   • For the full credit, your MAGI (modified adjusted gross income) is less than $80,000 ($160,000 if you're filing jointly)
   • For a reduced credit, your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you're filing jointly)
   • There is no credit given if your MAGI is above $90,000 ($180,000 if you’re filing jointly)
2. If you :
   • qualify to claim education credit, your goal is $4,000 spent on tuition. Any scholarship beyond that goes to living expenses. 
   • don't qualify: Box 5 minus Box 1 minus the additional  eligible school costs = amount to go on her return as scholarship income.

@jaybird84