1098 T Scholarship Exceeds Tuition Questions

[Xxsierra1986]

@Hal_Al 

My daughter is a first year college student. We received a 1098-T from the college. This form shows that the scholarship amount exceeds the tuition amount. Even though we had to take out loans and pay out of pocket to cover all the expenses. Through research I found that the cost of Room & Board is not a qualified expense, so it's producing taxable income. My daughter did work throughout the year and is just above the standard deduction, so this taxable scholarship makes it even higher, so she has to file. 

Box 1- 14406 Box 5- 16623

On top of those scholarships the loans & payments equal $3747. There is another $600 in books & other stuff that qualify. Because the room & board is $5895, its saying that she owes tax on the difference in Box 5 to Box 1. I claim her on my taxes as a dependent, when I enter the 1098 T exactly as shown, she owes a small amount for federal tax and it does not help me at all for the Education Credits. 

Here's my questions- TurboTax gives me a prompt asking how much of the scholarship money was used for Room & Board. When I enter the full $5895 that the college charges, it qualifies me for the Education Credit. It then gives me a prompt that she has to claim that amount on her tax return, which increases her tax bill owed. Her tax bill owed is much less than the credit I receive, so the offset of it would be beneficial in the overall. 

Am I calculating this correctly? Can I claim that full room and board cost and qualify for the credit? 

This is her first year, so it's only one semester on cost. I'm thinking next year will be even more as she will have 2 academic semesters to account for, so I'm trying to figure out the best way to work around this room and board non-qualified expense (which I find absolutely ridiculous!)

Thanks for your help!

[Hal_Al]

@Xxsierra1986  said: "When I enter the full $5895 that the college charges, it qualifies me for the Education Credit. It then gives me a prompt that she has to claim that amount on her tax return, which increases her tax bill owed. Her tax bill owed is much less than the credit I receive, so the offset of it would be beneficial in the overall". 

Q. Am I calculating this correctly? Can I claim that full room and board cost and qualify for the credit? 

A.  Yes. That is allowed.  You may be able to slightly reduce to amount she is taxed on.  See example below. 

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.

[Hal_Al]

Q.  This is her first year, so it's only one semester on cost. I'm thinking next year will be even more as she will have 2 academic semesters to account for, so I'm trying to figure out the best way to work around this (which I find absolutely ridiculous!)

A.  No. The AOC is $2500 maximum, based on only $4000 of qualified expenses.  So, more expenses isn't going to get you anymore.

There is no way around  room and board being non-qualified expenses.  That's the rules.  Well, not exactly.  The rule is that only tuition, fees and course materials are qualified educational expenses (QEE). Any part of her scholarship not used for QEE is taxable. 

[Hal_Al]

How to enter in TurboTax?

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 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.

[Xxsierra1986]

@Hal_Al 

Q. Am I calculating this correctly? Can I claim that full room and board cost and qualify for the credit? 

A.  Yes. That is allowed.  You may be able to slightly reduce to amount she is taxed on.  See example below.

Q. How may I be able to slightly reduce the amount she is taxed on by using that example?

I have seen this tax loop hole example posted on multiple community questions- I understand what it's saying but I do not understand how to enter it how you're explaining it.

I have entered her 1098-T as shown on form, I can then enter related expenses for her books & supplies etc., and then under the place where it asks how much of this scholarship was used to pay for room & board, is where I enter the amount that I have put on my return, correct? The full room and board charged by the college is the $5895, and I can claim this even if the scholarships paid for some of it? I get the full $2500 credit if I enter this whole amount. If I enter any less, I get less of a credit. I have tried different numbers up to this amount to see the difference, because then she would owe less taxes. I'm assuming that the IRS will cross reference our returns to see if we are claiming the same amount to be taxable, so I want to make sure the figures I'm using are accurate. 

Thanks for your help!

[Xxsierra1986]

@Hal_Al 

If I enter different numbers on our returns than what the 1098-T shows, isn't it going to throw a red flag? 

So I just enter any figures I want, what's the point of the 1098-T then?

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

* I have not received this prompt once I get past the Education Credits portion.

[Hal_Al]

Q. If I enter different numbers on our returns than what the 1098-T shows, isn't it going to throw a red flag? 

A. No. What you enter is not sent to the IRS, only the calculation results. 

Q. So I just enter any figures I want, what's the point of the 1098-T then?

A. Information for you to work with*.

Q. I have not received this prompt  ("Amount used to claim the tuition deduction or credit" ) once I get past the Education Credits portion.

A. That's why I provided an alternate method to enter data.  But, you can try searching for it. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.  

*The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. 

If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. 

[Xxsierra1986]

@Hal_Al 

Thanks so much for the help! 

One last question- when I get past the entering the tuition information on my child's return- it's asking for the parents SSN. Why is it asking for this information and whose SSN do I enter here? Is it going to ask for income info, etc after this? I've never had this prompt before, I'm assuming it's because there is unearned income to tax?

Also, does it make a difference on whose SSN to put when it comes to parent vs. step parent? 

My daughter is my step child on my return, I claim her as a dependent and have her whole life. TurboTax gives me the option of selecting a step child under the dependent information. I assumingly would put my SSN in on her return when it asks for it, since I'm the one claiming her and her education credits. Is this accurate? 

Thanks!

[Hal_Al · Accepted solution]

Yes, taxable scholarship is unearned income*, and is subject to the "kiddie tax", wherein a portion is taxed at the parent's marginal tax rate. You will be asked for parent income. 

Yes, for tax purposes, a step parent is the same as a biological parent.  If you file a joint return, use the 1st name listed on the joint return.  If you claim her on a separate return, yes use your info. 

*Scholarship income is unearned for purposes of the kiddie tax but treated as earned for purposes of calculating the student's standard deduction (earned income + $350, but not more than $12,550)

[Xxsierra1986]

@Hal_Al 

Another question! On my tax return I used the $4000 and bypassed using the info that was on the 1098T to receive the credit.

I'm finishing my child's returns now- do I use the same amount on hers? I would just put the $4000 in her box so that she is taxed on that amount correct?

Thanks!

Sierra

[Hal_Al]

Q. I'm finishing my child's returns now- do I use the same amount on hers? I would just put the $4000 in her box so that she is taxed on that amount correct?

A. No.  How to enter was explained above, in the same answer that told you to enter only $4000.

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 (apparently $5617 in your case*) in box 5. In that case be sure the amount in the  "Amount used to claim the tuition deduction or credit" box  is 0.

*$14,406 in box 1

+        600  Books etc

=   15,006  Total QEE

    -    4,000 used for the credit on your return

=    11,006  Can be used for the scholarship

 $16,623  Scholarship

-  11,006  adjusted QEE

=   5,617  Taxable scholarship income

[AmyC]

The 1098-T would not go on your daughter's return, only yours. She gets the scholarship income, you get the form. You only need to enter her taxable scholarship income and keep records of how you determined it. The credit is only good for 4 years so make sure you get the full $2500 credit this year or wait.

[Xxsierra1986]

@AmyC 

Thanks for the response!

If I don't enter the 1098T on her return, where do I enter this taxable scholarship income?

I claimed the $4000 in expenses on my return to get the credit. 

She has tuition of 14,406. Scholarships of 16623. Room and board of 5895. Loans & payments of 3747. 

Can her taxable income be more or less than the $4000 I claimed? 

Sorry, this is just so confusing! And I don't want to not pay the correct tax bill. 

[Xxsierra1986]

@Hal_Al 

Sorry I missed this response!

I see where you've explained the same thing above. It's just confusing because the screens you are saying to enter info on are not what comes up when going through the education stuff.  It does let me enter school tuition info unless I enter a 1098T, like Amy had suggested. 

I'm confused on why we would have a taxable income of the $5617, if we only used $4000 to claim the credit. It raises the tax liability substantially. I do not get the prompt about "Amount used to calculate education deduction or credit" so that I can make sure a certain amount is entered. I have searched for it as well and I'm not finding it. The screens I'm getting are only asking for the 1098T info, a separate screen to enter book allowance, and another screen to enter amount of scholarship used for room and board. At the end its just adding all taxable income together (work & school) and giving me my bill. So the the places you're mentioning to enter the info is just not there, making it more confusing!

[Hal_Al]

Yep, it's confusing and TurboTax does always do a good job.  That's why I gave you the short cut . On the student's return, at the 1098-T, enter 0 in box 1 and the taxable amount in box 5.

You say "I'm confused on why we would have a taxable income of the $5617".   That's why I showed you the calculations (repeated below). .   Don't get hung up on the  room & board number and student loan amounts. Those are irrelevant. 

See if you can follow the math:

$14,406 in box 1 Tuition & fees Qualified educational expenses (QEE)

+        600  Books etc (also QEE)

=   15,006  Total QEE

    -    4,000 used for the credit on your return

=    11,006  QEE  left over

 $16,623  Scholarship

-  11,006  adjusted QEE used to keep that much of the scholarship tax free

=   5,617  Of the scholarship is taxable income (because we're all out of QEE)