Pay Tax on Dual-Enrollment Scholarship from Senior Year?

[dazein]

• In 2020, my daughter received a dual-enrollment scholarship during  spring semester of her senior year of high school to attend a college class while still attending high school. She received a 1098-T for the scholarship listing the tuition cost and scholarship which did not pay for the entire cost of tuition (we had to cover $50). The 1098-T does not check that she was at least half-time because she was not, at the time, a college student. After entering this 1098-T into Turbo Tax, and was asked if her enrollment status for 2020 was at least half-time, I answered "yes" because she was full-time in the fall of 2020.   
• She then began college full-time in the fall of 2020 and received a 1098-T for scholarships received which do not exceed her tuition and pay for only tuition and eligible expenses. This 1098-T was entered into Turbo Tax. 
• She also received scholarships in the summer of 2020 from her high school which are also captured in Turbo Tax (not as a 1098-T). 

Q: Why is Turbo Tax is saying that she must pay tax on all of the scholarships which she has received in 2020 even though all of her expenses were eligible (e.g. for tuition and fees, but, not room and board), and she was a full-time student?

Q: And, if it is correct that she should not pay tax on her college-provided scholarships, would she still need to pay tax on the scholarship she received when still in high school, as well as those she received after graduation from high school but before beginning college in the fall of 2020 because she was not yet a full-time college student?

Q: Is it inaccurate to state that she was a full-time student in relation to the high school dual-enrollment scholarship  because she was not a full-time college student at the time she received and used the loan?

[AmyC · Accepted solution]

1. Something is not right on your return. You have to enter the actual amount or click the box to make the program calculate the numbers. You missed a step.

Scholarships up to the tuition amount can be manipulated to the parents advantage. As the parent, if you qualify to receive AOTC, you can shift things for you to qualify. However, you only get the credit for 4 years and this year was not too exciting. The senior year still counts as undergrad even if grad school the second semester.

The long answer is to first determine if you want to use AOTC this year or wait.

If you are waiting or do not qualify, then tuition, books, supplies minus scholarship equals income to your daughter. If scholarship is less than expenses, nothing to worry about and you may want to claim a different education credit or even AOTC,

The IRS says in Publication 970 (2020), Tax Benefits for Education | IRS: When figuring an education credit or tuition and fees deduction, use only the amounts you paid and are deemed to have paid during the tax year for qualified education expenses.

2. College scholarship is college scholarship regardless of when received.

3. The 1098-T has a box that will be checked if at least half time. The IRS looks at a student for any part of 5 months so the fall semester, Aug- Dec would qualify and allow full time status on the tax return.

[dazein]

Thanks for the quick reply, AmyC! I will look over anything I may have missed.

Just to clarify (thanks for you patience!):

• It sounds to you like there is some error that is erroneously  telling TurboTax that all of her scholarships are taxable? 
• Though my daughter received some scholarship (acknowledged on a 1098-T that does not indicate her as at least half-time) while a senior in high school in the first quarter of 2020, she is still considered full-time because of attending college in the Fall of 2020?
• If you have more than one child in college, can you use AOTC for four year per child, or, only four years total?

Thanks again!

[AmyC · Accepted solution]

1. All scholarships count but are they taxable only to the extent they were not used for education expenses. The IRS says in Publication 970 (2020), Tax Benefits for Education | IRS: 

A scholarship or fellowship grant is tax free only to the extent:

• It doesn't exceed your qualified education expenses;

• It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and

• It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship. For exceptions, see Payment for services, later.

2. I don't understand the 1098-T not having half time marked. You may want to double check that courses were not dropped or contact the bursar. Same IRS pub says: 

Half-time student: 

A student who is enrolled for at least half the full time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.

3. 4 years AOTC per student. See Appendix B of the above pub for all the education options and handling.

[dazein]

I went back to Turbo Tax and deleted all of the information I originally entered, suspecting that something had corrupted the data. I re-entered the data and now turbo tax is not longer telling me that my daughter must pay taxes on all of her scholarships (which I knew, based on what you said and I've read) was inaccurate. 

So, problem fixed! Thanks for all you help!

Sean