Can 1098-T Box 5 minus Box 1 be reported on my daughter's tax return?

[jwkinrva]

TurboTax asked…

Was any of the Alice’s financial aid already included as income?

Tell us if any of the $XX,XXX in Box 5 of Alice’s 1098-T includes amounts already reported as income on Alice’s tax return.

Yes Alice had scholarship or other aid reported on a Form W-2 or Form 1099-MISC

How much of the $XX,XXX received in scholarships, fellowships, grants or other aid was already reported on Form W-2 or Form 1099-MISC as income?

No, Alice did not have any scholarship or other aid reported on a Form W-2 or Form 1099-MISC.

Situation: Box 1 (Payments received for qualified tuition and related expenses) is approximately $4000 less than then Box 5 (Scholarships and grants).

Question: Can my daughter report the $4000 as income on her tax return if she did not receive s Form W-2 or Form 1099-MISC reporting $4000 as income?

Thanks!

[Hal_Al]

Question: Can my daughter report the $4000 as income on her tax return if she did not receive s Form W-2 or Form 1099-MISC reporting $4000 as income?

Answer: Yes, she can and must.  The $4000 of taxable income can be reduced by any other fees or book costs not included in box 1 of the 1098-T.

Actually, you may want her to report more than $4000 of taxable scholarship. There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit (AOC or AOTC), 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.  $4000 is the maximum amount of expenses needed to claim the maximum AOC.

[jwkinrva]

@Hal_Al

Let's see if I understand this...

Current Plan

I report on my joint return

Box 5: $17,000

Box 1: $13,000

Other Qualified Ed. Exp.: $500

Net Taxable Income: $3,500

No AOC/AOTC Available

Option

I report on my joint return

Box 5: $0

Box 1: $3,500

Other Qualified Ed. Exp.: $500

Tax Credit: $4,000

AOC/AOTC available

Daughter reports on her joint return

Box 5: $17,000

Box 1: $9,500

Other Qualified Ed. Exp.: $0

Taxable income: $7,500

No AOC/AOTC available

[Hal_Al]

@jwkinrva 

Yes, you  have the options right. You essentially have to use a work around in TurboTax (TT).  Those numbers will work..

Clarification: under the "current plan"; the Net Taxable Income of  $3,500 goes on the student's return, not yours.