2 education-related errors: Non-taxable scholarship is showing up as income and TT says I’m ineligible for LLC

[honem]

I’m a med student with very little earned income and only a small tax liability (due to dividends) of approximately $350. My tuition for 2023 was $85K and I received a tuition scholarship of $15K. I used a 529 to pay for the remaining $70K of tuition. When I enter my 1099-Q and 1099-T, TT is telling me that I don’t qualify for the LLC (even though the IRS decision tree says I should) and it’s treating my $15K scholarship as taxable. I’ve tried playing around with entering other expenses like room/board and books, and deleting the 1099-Q altogether (based upon prior forum recs), but no matter what, it doesn’t change the outcome. Seems like it may be a TT glitch or I answered a question wrong, although I can’t figure out where? Any suggestions would be greatly appreciated.

[Hal_Al]

The LLC is a non refundable credit. So, TurboTax(TT) is probably using the full $10K (the max) of tuition to calculate a $350 credit, when it only needs to use about $1750. So, yes, it is a weakness in TT. 

Two things you know: neither the scholarship or the 529 distribution are taxable.  Both the 1099-Q and the 1098-T are only informational documents. The numbers on them are not required to be entered onto your tax return. So, don't enter the 1099-Q at all. 

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”.

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. 

If you find it easier (and in your case will be easier), just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

In your case, you know you have room and board to cover some of the 1099-Q, so you can re-allocate some of the tuition for the LLC.  Make a reasonable estimate for room & board (for example let's say $5000) and enter your 1098-T with $5000 in box 1 and box 5 blank. 

[honem]

Thanks so much.

I did realize reporting the 1099-Q was not required, but I didn't realize I didn't need to enter the 1099-T.

I will take your wise advice and just not input either.

As for the LLC, the program tells me I don't qualify at all. I realize I can't claim more than the tax I owe, but shouldn't I at least be able to claim the $350 to offset my tax liability of $350?

[Hal_Al]

Q. Shouldn't I at least be able to claim the $350 to offset my tax liability of $350?

A. Yes, as explained above. 

Enter your 1098-T with $1750* (the amount needed to get $350 of LLC) in box 1 and box 5 blank. 

* As explained above, you can justify entering a larger amount. 

[honem]

I think I get it now.

Thanks for the tips. 

Crazy that there have to be this many work-arounds for what should be a straightforward entry process.

[honem]

UPDATE: Still struggling to make this work. My total tax owed is now $1200 (I added some miscellaneous income). I tried your excellent suggestion, did not enter the 1099-Q, and filled out the 1099-T with varying amounts on Line 1 (initially around $5K which should have calculated to be about the same credit as the tax I owe, then lower and lower amounts), but TT still says I’m not eligible because either I can be claimed as a dependent on someone else’s return (NO) or that I don’t have enough educational expenses. Would appreciate any additional advice!

[Hal_Al]

Go back to the personal info section and recheck your answers to the can be and are claimed as a dependent questions. Even when you can be claimed as a dependent, you are allowed to claim a non-refundable credit, if you are not actually claimed.  

[honem]

I did verify that I'm not not listed as a dependent nor am I eligible to be listed as a dependent on anyone else's tax return. I even went back and verified the actual forms to make sure there were no errors (the form showed I had accidentally checked the box about having a felony conviction for the Hope Credit, which didn't apply to me anyways, but I fixed it LOL). All of the entries seem to check out. Again, I tried different amounts in Box 1 of 1099-T, from $25 up to the the true amount of $85+, including the calculated amount of $5880, but no luck. I made sure the 1099-Q form (which I had originally filled out) got deleted. After all of this, it still says I don't qualify because either I'm listed as a dependent on someone else's return or I don't have any net education expenses.

[CatinaT1]

Try closing TurboTax, clear your Cache and Cookies if you are using TurboTax Online, and reopen TurboTax.  You can also try a different browser.

Also, make sure you have ran all updates. 

If using TurboTax Online: Clear your cache and cookies. See this FAQ, for your particular browser.

If using TurboTax Desktop: Please see this FAQ.

I would also do a manual update if you are using the desktop version: Manually Update TurboTax for Windows Software