Q. Is financial aid for college considered income for my dependent?
A. Sometimes.
Scholarships that pay for qualified educational expenses (QEE - tuition, fees, books and other course materials) is tax free. Scholarship amounts that exceed QEE is taxable income, on the student’s tax return.
If box 5 of the 1098-T exceeds box 1, TurboTax (TT) will treat the difference as taxable income, unless you enter additional QEE at books and other expenses. Room & board are not QEE for scholarship money to be tax free.
If you are entering the 1098-T, on your return, TT will advise you that your student has taxable scholarship income. It will not (and should not) enter the taxable scholarship on your tax return.
If box 1, of the 1098-T, exceeds box 5 by less than $4000 ( is less than box 5), you may actually want to declare some of his/her scholarship as taxable to allow you to claim the full tuition credit.
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.
A student, with no other income, can have up to $13,850 (in 2023)of taxable scholarship ($14,600 in 2024) and still pay no income tax.
