Our dependent child rec'd 1098-T with Box 5 exceeding Box 1. Child has $18k in W-2 wages. Does 1098-T (and taxable scholarships) go on child's or parent's tax return?

[KolacheKowboy]

Child was 20 at 12/31/22. We are claiming our child as a dependent. Child is enrolled full-time at accredited university. Not enough qualified education expenses to offset the amount that Box 5 exceeds Box 1. Likely taxable income. Just not sure if taxable scholarship income goes on child's or parent's tax return.

[DMarkM1]

The taxable scholarship income goes on the dependent's tax return since he is required to file with W2 income of over $12K.  Typically without any out-of-pocket qualified education expenses the parents would not be eligible for education credits on their return.  The parent's would not need to enter the 1098T on their return.   

However,  in very unique circumstances it is possible for the parent's to get an education credit by shifting some more of the scholarship to the dependent's income vice paying for education expenses.  Of course the dependent tax will increase but the credit on the parent's return may result in a net gain. 

Your credit may increase only if the amount of the student's qualified education expenses minus the total amount of scholarships and fellowship grants is less than $4,000. 

First, the rules for the scholarship/grant have to allow the funds to be used for other than qualified education expenses.  The parent's modified adjusted gross income needs to be below $90,000 ($180,000 for joint filers) to allow the education credit.  

Next, enter the 1098T on the parent's return with 4000 box 1 amount or the actual box 1 amount whichever is less and no box 5 amount.  Then on the dependent return enter the 1098T and in box 5 increase the scholarship number by the 4000 or box 1 amount entered on the parent's return.  

See the Publication 970 reference here for more details on this credit opportunity.   

[KolacheKowboy]

Ok, thank you for the thorough response. You mentioned that the scholarship income will go on our dependent child's tax return ... how do we include/report that? Do we manually increase the W-2 reported wages for our child by tacking-on the taxable scholarship income? Also, you mentioned in "very unique circumstances" it's possible for the parents to "shift some more of the scholarship to the dependent's income" ... but based on the first comment, it sounds like you're saying all the taxable scholarships are supposed to be included in our dependent child's income already. And I think the MAGI on our MFJ return will exceed $180k ... so it may be a moot point.

[KrisD15]

In TurboTax, you can enter the excess/taxable  amount on the student's return by entering the 1098-T in the Education Section of the Student's return (under Deductions & Credits) , or only entering the amount the student needs to claim. This second option would be entered in the same section (Education) but you needn't enter the 1098-T, only the taxable portion of the scholarship amount as a scholarship. 

Normally the 1098-T is used on the Taxpayer claiming the student to calculate an education credit, but if the scholarship exceeds the fees, there would be no credit. (Don't forget about Book and Supply expenses not listed on the 1098-T) So in this case (no credit) the 1098-T needn't be used by the Taxpayer claiming the student. 

Yes, it is POSSIBLE to allocate expenses to scholarships and distributions from education savings account, to free-up expenses for a credit. For example, a scholarship could be allocated to Room and Board. Using Room and Board expenses would make the scholarship taxable, but the tuition expenses it "frees-up" could count for a credit. ( A Distribution used for Room and Board is treated differently. Room and Board expense DOES make distributions non-taxable) 

As you say, if your Modified Adjusted Gross Income (MAGI) is 180,000 or over, you wouldn't be eligible for either Education Credit. 

You can look over Pub 970 for more information. 

[Hal_Al]

Yes, in your case, the "loop hole" is a moot point.

But, for other reading this:

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 (AOC). 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.

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”.