1098 T Form - Scholarship and Grant Money Exceeds Tuition - What Now?

[margaret19cameron]

This is my first year filing as independent and I am lost with the 1098 T form I received from the college I attend. In fall 2020 I received a total of $2547.50 in grants/scholarships and I had $492 left over after tuition was paid, which I used for books. From my understanding, the extra money I had leftover does not have to be included in my taxable income because I used it towards qualified education expenses. When I file my taxes, how do I ensure that $492 I used on books is not included as taxable income?

[Hal_Al]

Q. From my understanding, the extra money I had leftover does not have to be included in my taxable income because I used it towards qualified education expenses.

A. That is correct.

Q. When I file my taxes, how do I ensure that $492 I used on books is not included as taxable income?

A. Just don't enter the 1098-T since you know it all comes out even. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return.  Otherwise, follow the TT interview very carefully and enter you book expenses at the book screen.

That said,  There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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.

Caveat: A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. You usually must have actually paid tuition, not had it paid by scholarships & grants.  It is usually best if the parent claims that credit. 

[Hal_Al]

The question you didn't ask: Are you sure you qualify to file as an independent?

There are two types of dependents, "Qualifying Children"(QC) and standard ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test. Only a QC qualifies a taxpayer for the Earned Income Credit. They are interrelated but the rules are different for each.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are considered third party support and not as support provided by the student.
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on him self.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

Furthermore, there is a rule that says IF somebody else CAN claim him as a dependent, he is not allowed to claim himself. If he has sufficient income (usually more than $12,400), he can & should still file taxes. In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.  TT will check that box on form 1040.

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

[Trichards77]

Hi, for the  tax loopholes the education credit,  How do you split it up with a tax program, when you have to put everyone information  in from the 1098T form? It automatically counts line 5.

[Hal_Al]

You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You (the parent) only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Enter the 1098-T, exactly as received, on the student's return. Enter book expenses separately.  In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.  

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount  in box 5. In that case be sure the amount in the  "Amount used to claim the tuition deduction or credit" box is 0.

[Trichards77]

So would his books and computer( needed because online) be put on his taxes then? 

This is legal right? If done as you said?

sorry so many questions, I never knew there was a way to claim it, so this is all new to me

[Hal_Al]

Q. So would his books and computer( needed because online) be put on his taxes then? 

A. Yes

Q. This is legal right? If done as you said?

A. Yes.  From the 2019 form 1040 instructions (pg 95): “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, line 18c, and IRS.gov/EdCredit.  Page 16 of PUB 970 (2019) actually has examples of how to do the “loop hole”. 

[Trichards77]

Wow thank you!!😊

[Trichards77]

Hi Hal_Al,

so I did my taxes with  the 1098 t form like you stated, and I saw the reference for pub 970 so I see where it says you can do it.

Although, I I still had  a couple questions for you .

1). Now that I did my taxes, the State wants me to send in the 1098 T form along with my W-2s and other information. It will be OK right? Or do I need to write a note in there explaining that we used the grant money as income on my sons taxes  according to publication 970. 

2)while I'm trying to do my sons taxes on TurboTax now I still do a 1098 T form for my son . I put 0 in box 1and the amounts 5-1 and box 5 correct? I don't put it in other income

[Hal_Al]

1). The State wants me to send in the 1098 T form along with my W-2s and other information. It will be OK right?

Up until now, we've been talking about how you are going to file a federal return to claim a tuition credit. Now you're asking about a a letter you've already received from the state? Which state and what did you claim?  Most states don't have a tuition credit or deduction.  You may have to start a whole thread to get a response from somebody familiar with your state's tax rules.

2). while I'm trying to do my sons taxes on TurboTax now I still do a 1098 T form for my son . I put 0 in box 1and the amounts 5-1 in box 5 correct?

No.  You put 0 in box 1 and what you calculate as the taxable amount in box 5.   You should end up with the box 5 amount on line 1 of form 1040 (added to any other line 1 income) with the notation SCH.

3). I don't put it in other income?

  If your student has other income, it gets reported 

[Trichards77]

Hi thank you again.

I want to  clarify , when I mentioned 'state' I meant my Wisconsin state income taxes form1 . When I printed my state and federal taxes up and, efiled them it printed up a w-ra form requiring attachments for electronic filing . Fr the homestead credit it asks to attach, w2's taxbills, 1098t etc

[AmyC]

The state understands how college tuition works and the IRS regulations. Send the 1098-T along with the other forms as required. The IRS wants you to manipulate numbers to your advantage in this one arena, Pub 970 is great.

[Trichards77]

Thank you. That is a relief, I never knew I could claim it before so I didn't know