1098-T and 1099Qs and scholarships

[mellynlee]

We have a 529 plan which we have used to cover my son's college expenses. My husband is the recipient of the 1099-Q, and we paid the school after taking the funds out of the 529. My son has received a 1098-T, which included a $5000 scholarship in box 5. However, the money we withdrew from our 529 (box 1 of 1099-Q) is exactly equal to all of my son's college expenses. We did *not* account for his $5000 scholarship. If we claim both the 1099 and the 1098 on our tax return, we end up paying tax for the extra $5K scholarship, since it exceeds our educational expenses.

I have seen several TT posts regarding scholarships, and it sounds like we could have my son claim the 1098-T on his tax return instead? And then he is taxed for the scholarship at a lower rate (or not at all, if he makes less than a certain amount?)? Is something like this possible, and if so, how would we do that?

We do NOT qualify for any of the Education credits because our MAGI is over the limit. We are claiming him as a dependent currently, but maybe it's better if we do not claim him?

[Hal_Al]

Q. t sounds like we could have my son claim the 1098-T on his tax return instead? And then he is taxed for the scholarship at a lower rate (or not at all, if he makes less than a certain amount?)? Is something like this possible?

A. Yes, that's the way to do it. Taxable scholarship must be reported on his return, not yours. 

Q. How would we do that?

A. Simple way: enter the 1098-T on his return with box 1 blank and the scholarship amount in box 5. TT will treat it as taxable.  Otherwise, enter the 1098-T, as is, when asked if any of the scholarship was used for room and board, answer yes and enter the amount.  Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B. 

Speaking of room and board,  room and board are qualified expenses for the 1099-Q, even if the student lived at home, as are books and a computer. 

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

References:

1. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

[mellynlee]

Thank you! Just to be clear:

Since my husband is the recipient of the 1099-Q, do we need to report that amount on our tax return? And we should NOT claim my son as a dependent? And we should NOT enter the 1098-T on our tax return?

When my son files his tax return, should he say that he is NOT claimed as a dependent on anyone's tax return? And when he fills out his 1098-T, he should just leave box 1 blank -- does this mean we acknowledged using up all of box 1 for educational expenses already, on our tax return?

If the scholarship $ was used for additional educational expenses, would he be taxed on the difference?

Thank you!

[Hal_Al]

Q. Since my husband is the recipient of the 1099-Q, do we need to report that amount on our tax return?

A. No, if it's fully covered by expenses.  But if it does need to be entered. it goes on your return, not his. 

Q. We should NOT claim my son as a dependent?

A. No. You should still claim your son as a dependent. The fact that he is reporting income, on his return, does not disqualify him as your dependent.  Dependents frequently file tax returns. 

Q. And we should NOT enter the 1098-T on our tax return?

A. Yes, for two reasons. You do NOT qualify for the tuition credit and you do not have to enter the tuition expense, because you are not entering the 1099-Q (you already know it's not taxable, and don't need TurboTax doing the complicated calculation). 

Q. When my son files his tax return, should he say that he is NOT claimed as a dependent on anyone's tax return?

A. No. He says he can be claimed and will be claimed.

Q. When he fills out his 1098-T, he should just leave box 1 blank?

A. Yes.

Q. Does this mean we acknowledged using up all of box 1 for educational expenses already, on our tax return?

A.  Yes.  Even though you don't actually enter any expenses on your tax return, you effectively used them up by declaring the 1099-Q "covered". 

Q. f the scholarship $ was used for additional educational expenses, would he be taxed on the difference?

A. Yes. 

[mellynlee]

Hi again,

Sorry, just a couple more questions:

You answered my first question as Correct - we need to report the 1099-Q on our tax return.

However, in question 3, you stated:

...you do not to enter the tuition expense, because you are not entering the 1099-Q (you already know it's not taxable, and don't need TurboTax doing the complicated calculation). 

So, do we enter or not enter the 1099-Q on our tax return?

Also, in that same question, you stated as a reason to not enter the 1098-T as: You do qualify for the tuition credit

However, due to our MAGI, I believe we do not qualify for any of the education tax credits, or the child tax credit.

I noticed this comment on this website as well: https://flyfin.tax/blog/when-should-i-not-claim-my-child-as-a-dependent

There are clearly more benefits than drawbacks to claiming your child as a dependent, but one clear situation in which you will not want to do so is if your income is high enough that you can't qualify for the education credits your college student dependent would allow you to qualify for.

If your child is a student, they probably have an income that's low enough for them to qualify for education credits, and it's very likely that those credits would amount to more savings for them than the Child Tax Credit would for you if you claimed them as a dependent. So, even though the Child Tax Credit is one of the most widely used by Americans when they claim their children as dependents, there are still times when it might be best not to claim your child as a dependent. It's always best to consult with a tax professional for advice on claiming children as dependents.

In reading this, it sounds like we should NOT claim our son as a dependent...and if so, can he qualify for any education credits? And how does all this affect my original question?

Sorry this is so confusing...thank you!

[Hal_Al]

Sorry, a couple of typos. I've corrected them above. 

Q. Since my husband is the recipient of the 1099-Q, do we need to report that amount on our tax return?

A. No, if it's fully covered by expenses.  But if it does need to be entered, it goes on your return, not the student's . 

Q. And we should not enter the 1098-T on our tax return?

A. Yes, for two reasons. You do NOT qualify for the tuition credit and you do not have to enter the tuition expense, because you are not entering the 1099-Q (you already know it's not taxable, and don't need TurboTax doing the complicated calculation). 

Q. In reading this (cited website comment), it sounds like we should NOT claim our son as a dependent...and if so, can he qualify for any education credits? And how does all this affect my original question?

A. That post is mostly just wrong. Note that he's talking about the child tax credit, which doesn't even apply to college age dependents (more than 16 y.o.). 

Technically there is a provision that allows your student-dependent to claim a federal tuition credit But, from a practical matter it seldom works out.  A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.   
If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return.

[mellynlee]

OK, got it. Thanks.

Question on claiming our son as a dependent or not. You stated:

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return.

First, will our son have a tax liability if he is claiming the $5K scholarship that was on his 1098-T? FYI, his income was less than $4K, and he was going to file to get some of his federal income tax returned to him.

Secondly, what is the "$500 other dependent credit" that you mention? I believe our AGI prevents us from receiving ANY credits or benefits for a dependent child. What are the reasons for claiming him as a dependent?

Thank you!

[AmyC]

1 The scholarship plus earned income is below the filing requirement of $13,850 so he should get a refund.

Due to the scholarship, your son has unearned income for purposes of the kiddie tax. It doesn't apply this year since he is below the filing requirement. Just something to keep in mind for future years. See What is the Kiddie Tax? so that you are aware of requirements.  See also Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)

2. Other Dependents Credit is often used by parents of college kids. From  What You Need to Know about CTC, ACTC and ODC

• Know that for ODC:
  • This is a non-refundable tax credit of up to $500 per qualifying person.
  • The credit begins to decrease in value if your adjusted gross income exceeds $200,000 ($400,000 for married filing jointly).

The only reason to claim him would be because you can. In your case, with no credits or deductions allowed, it isn't necessary. It is necessary that your son mark that he can be claimed.

[mellynlee]

Thank you.

If I understand correctly:

When my son files his tax return, he reports his 1098-T (but he can/should leave the box 1 blank, since we paid that amount with the 529 and reported the 1099-Q on our tax return?).

Because his total income is below $13,850, he will NOT be taxed on any of his income (including scholarship), and he should be able to get a refund of his federal income tax that was withheld?

In the future, if his income goes above the $13,850, he will need to pay a "kiddie tax" on the excess amount over that limit?

Since we will not get any credits by claiming him as a dependent, does it matter whether we claim him or don't claim him? If we do NOT claim him, can our son get any refundable (education) credit at all? (Hal_Al stated: If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. ) I'm assuming he will not have a tax liability, because he would not owe any taxes, correct?

Thank you!

[Hal_Al · Accepted solution]

Q. Since we will not get any credits by claiming him as a dependent, does it matter whether we claim him or don't claim him?

A. No. If your income is above $180K, you don't get the AOTC. If it's above $400K, you don't get the ODC.

Q. If we do NOT claim him, can our son get any refundable (education) credit at all?

A. No. Congress specifically wrote the law to  prevent that (ineligible parents tying to switch the refundable credit to the kid). Furthermore,  a student who is not actually claimed as a dependent, must still check the box, on form 1040, that says he CAN be claimed as a dependent. 

Q.( If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. ) I'm assuming he will not have a tax liability, because he would not owe any taxes, correct?

A. Correct 

Q. When my son files his tax return, he reports his 1098-T (but he can/should leave the box 1 blank, since we paid that amount with the 529 and are claiming the 1099-Q to be tax free?

A. Yes.  Entering it that way is a short cut. 

Q. Because his total income is below $13,850, he will NOT be taxed on any of his income (including scholarship), and he should be able to get a refund of his federal income tax that was withheld?

A. Yes. The answer might be different if he had any unearned income (e.g. interest, dividends. capital gains, taxable 529). 

Q. In the future, if his income goes above the $13,850, he will need to pay a "kiddie tax" on the excess amount over that limit?

A. Yes, if his income is earned income (wages) and taxable scholarship*. The $13,850 could be a lower amount, if  he has unearned income, e.g. interest, dividends. capital gains, taxable 529).  If his income is mostly wages, then the $13,850 would be higher. If his income is all wages (no scholarship) then the kiddie tax doesn't apply at all. 

*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.  

[mellynlee]

OK, I think I finally got it. Thank you so much for all your help!

[mellynlee]

OK, I know this question is "resolved", but now I'm having problems trying to enter everything as discussed.

What I am trying to do:

-We are claiming my son/student as a dependent (since we've established it makes no difference either way)

-I am entering the 1099-Q on  OUR tax return

-I *deleted* the 1098-T on OUR tax return, because my son was going to claim it instead (since he got the scholarship)

The problem with this is that TurboTax is now charging me a lot more tax - presumably taxing the 529 distribution that we took out (to pay for tuition/fees).  There was nowhere to enter the numbers showing that the entire distribution was used to pay for educational expenses. That had been entered under the 1098-T form (which I deleted).

I have found several other posts that state we should NOT enter the 1099-Q info at all into TT since it is not "necessary" to enter:

https://ttlc.intuit.com/community/college-education/discussion/how-to-handle-1099q-for-dependent-chi...

It seems incorrect to not enter the 1099-Q at all, but if this is the easiest way to get around being taxed on it incorrectly, then should I do that?

However, wouldn't my son be REQUIRED to enter the 1098-T on his return to at least note his scholarship? Even though he shouldn't be taxed on it?

How should I handle this?

Thank you!

[Hal_Al]

Q. It seems incorrect to not enter the 1099-Q at all, but if this is the easiest way to get around being taxed on it incorrectly, then should I do that?

A. Yes. You're too confused to do it the long way. Take the short cut. Don't enter the 1099-Q or any educational expenses.  You get the same result, either way. None of the 1099-Q is taxable.

Q. However, wouldn't my son be REQUIRED to enter the 1098-T on his return to at least note his scholarship?

A. No. He is not REQUIRED to enter the 1098-T, But, if he is going to file a tax return,  he does need to report the taxable scholarship and entering A 1098-T is the best way to do that.  The simple way: enter the 1098-T on his return with box 1 blank and the taxable scholarship amount in box 5.