Questions about 1098 tax form. Box 1 said $3500, and Box 5 said $15,000 in scholarships. Must I pay that much?Or xxxxx-xxxx=11500. My earnings will be that.Explain easy

[786winaung]

I'm curious about the 1098-T form. Firstly, do I have to pay for this tax form, and if so, how much? Regarding Box 1, which shows $3500, do I owe that amount? Additionally, for Box 5, indicating $15000 in scholarships or grants, do I need to pay taxes on this sum? OR xxxxx-xxxx=11500. I will recieve 11500.  I am so confuse about that 1098 tax file. please explain easliy. I am worry to pay for that amount of money.

[Hal_Al]

Q. Firstly, do I have to pay for this tax form, and if so, how much?

A. You can't use the free edition. The upgrade is $39.99. 

Q.  What amount do I need to pay tax on.?

A.  Simple answer $11,500 (15000 - 3500). But maybe nothing and could be more.

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 and board are not qualified expenses. 

If you have no other income, the scholarship will not get taxed, as you are allowed to deduct the (up to) $13,850* standard deduction.  If that is only income, you do not even need to file a tax return. 

If you are your parent's dependent, they will, most likely,  want to claim the tuition credit by using the $3500 in box 1 (plus any books and a required computer) as QEE**.  In that case, you will report the whole $15,000 as income and pay a little tax on the amount over $13,850 (about $115 tax).

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*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).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

**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.

[K_AK]

For this question as i have similar situation for my daughter:

 1- What form should the student use to report Extra scholarship money that is taxable? Please note that my daughter doesn't have any other source of income so no other tax forms. I will report 1098-T on my tax return to get the education credit where my daughter is dependent.

2- You mentioned if the taxable scholarship amount for a student is less than $13,850 (standard deduction) then student doesn't have to file tax return.

 When filing my tax return, i got the message your daughter needs to file a tax return of $XX,XXX taxable income. Are you saying that this message can be ignored and it is OK for my daughter not to report tax return if the extra taxable scholarship is below this threshold, so she will not be audited by the IRS for not filing this?

[Hal_Al]

Q.  When filing my tax return, i got the message your daughter needs to file a tax return of $XX,XXX taxable income. Are you saying that this message can be ignored and it is OK for my daughter not to report tax return if the extra taxable scholarship is below this threshold?

A. Yes, if $XX,XXX is less than $13,850 and she has no other income.

Q. So, she will not be audited by the IRS for not filing this?

A. Correct. The IRS computers are not programmed to look for this.

Q.  What form should the student use to report Extra scholarship money that is taxable? 

A. If it does need to be reported, the taxable amount goes on line 8r of Schedule 1.  The easy way to enter it, in TT,  is for the student to enter the 1098-T with 0 in box 1 and the taxable amount of scholarship in box 5. You should do this even if the parent has used the 1098-T on their return. 

Q.  I will report 1098-T on my tax return to get the education credit . My daughter is dependent. How does that affect what she reports?

A. She adjusts (increases) the taxable amount of the scholarship to account for the amount of tuition you used to claim the tax credit. See example below. 

Q. Does she need to file a tax return if the adjusted taxable amount is still under $13,850?

A. No. But, you may want to consider having her file to document that she reported the extra amount as taxable, so you can get the credit. 

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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.