Is the entire box 5 1098-T taxable

[AnnetteB6]

Start by going to the Education section of your return using these steps:  

• On the top row of the TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner)
• This opens a box where you can type in “education” (be sure to enter exactly as shown here) and click the magnifying glass (or for CD/downloaded TurboTax, click Find)
• The search results will give you an option to “Jump to education”
• Click on the blue “Jump to education” link

Then, if you are not prompted to enter your 1098-T, go through the entire education expenses section (without entering any information yet) of your return until you reach the screen titled “Your Education Expenses Summary”, then follow these steps:

• Click Edit next to the student name.
• On the screen titled “Here’s your Education Summary”, click Edit beside Tuition.
• Enter the information from your Form 1098-T.

@Twobit12

[digital_phc]

Carl,

I'm having a problem understanding the 1098-T and 1099-Q for my daughters tax return.

Her 1098-T

Box 1 $51,955

Box 5 $58,493

Difference $6,538

So I assume she will be paying Taxes on the difference between Box 1 & Box 5

On her 529 Plan we took out for the whole year but unfortunately we took it all out in 2020

So on her 1099-Q it shows the following

Box 1 $8,348 Gross distribution

Box 2 $4,345 Earnings

Box 3 $4002 Basis

She lived in the dorms part of the year and then was sent home in March and received a $950 credit for dorm room. Then in the fall of 2020 she rented a house with 3 other girls and paid $650 a month for rent and about $400 a month on food. I think those 2 items will help reduce her expense on the 1099-Q. Please let me know if I'm correct on the Rent and Food helping to reduce her taxes.

I think she needs to report both of these on her Tax Return. As I am divorced, her mom claims hers as a dependent on her return but does not Qualify for the AOTC, I think because of the 1098-T showing more in Box 5 than in Box 1.

Is there any way to reduce the amount of taxes my daughter will owe. You also talk about a chart at the bottom of your reply that doesn't seem to exist anymore. I would like to see that and maybe it will help my understanding of this whole process. It seems overly complicated but I know it's something that has to be done. Thanks for any help you can provide on my problem.

V/R,

Steve

US NAVY Veteran

[AmyC]

Yes, we can reduce taxes for all, there are options. The expenses go on the same return as the student. The 529 plan goes on the return of the person whose name is on it unless it covers all education expenses, then it does not have to reported. Our goal, get the 529 to cover education expenses if possible.

Box 1 is only the college. You had more expenses for items required by the school, books, paper, stuff. Add those costs together.

Box 5 scholarship went towards room and board - living expenses to some degree. The question is to figure out how much. The more you put towards room and board, then less is left for education. Remember, the goal is to get that 529 used for college expenses. The more that goes towards living expenses, the more goes into her scholarship income. Her tax rate is low, $0 for the first $12,400 versus your tax rate. Plus, if you can get education credit to boot, win- win!

It is a tricky game getting all the numbers figured out. The IRS allows you to be smart with your money.

Please  look at another of my answers for help. .on how to do this.

@digital_phc 

[Hal_Al]

Qualified Tuition Plans  (QTP 529 Plans) Distributions

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

**Alternatively; 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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, in case of an IRS inquiry.

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." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.

________________________________________________________________________________________

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.

[Phil mcculey]

How to get

[Hal_Al]

Q. How does the parent get the tuition credit, in TurboTax, when the student has scholarship in box 5 of the 1098-T?

A.  You can both use the 1098-T to enter the expenses. If you claim the tuition credit, you do need to report that you got one (the TurboTax interview will handle this) Your student should use the 1098-T because it makes entering scholarship income go smoother and puts the income in the right place on the tax forms (line 1 of form 1040 with the notation “SCH”).

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.