Form 1098-T

[BG105]

We claim our daughter as a dependent.  She received a scholarship and we reported the 1098-T on our tax return.  When completing our return, a message popped up that our daughter would also have to file a return for this.  She also had a part time job, but only earned $4465.  Does she have to report the scholarship or a portion of it on her tax return too?

[ColeenD3]

It depends.

 If you’re getting a degree at an eligible school, your scholarship is tax-free when used for:

• Tuition and fees
• Fees, books, supplies or equipment required for your courses
• Any scholarship or fellowship for services received under the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program

If you use your scholarship to pay for any of these, it counts as income and the amount paid is taxable:

• Room and board
• Travel
• Any fees, books, and supplies or equipment that are not required for your courses

It doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship. (But for exceptions, see Payment for services in Publication 970).

For example, if you used your scholarship to pay for tuition and room and board, you would be taxed on the room and board payment but not tuition.

[Hal_Al]

Yes, if she is already filing a return to get a refund of her withholding on the  $4465 job income, she does need to include the scholarship.  No tax will be due if her total income (wages + scholarship) is less than $12,400.

You didn't say whether you qualified for a tuition credit on your return. Often, when the student has taxable scholarship, the parent doesn't qualify for the credit.

Be advised, that 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.

[BG105]

We are reporting it on our return.  So our daughter does not have to report it on her return too, is that correct?  Is there any situation where it needs to be reported on both our returns?

[BG105]

This is helpful.  Do state regulations differ from federal?  It is showing taxes due for state (AL).

[Hal_Al]

Q.  We are reporting it on our return.  So our daughter does not have to report it on her return too, is that correct?  

A.  It depends on what "it" is.

The 1098-T goes on your return, if you are claiming a tuition credit.  It can also go on her return if she needs to report scholarship income.  So, yes, it can go on both returns*.  

You do not report his/her income on your return. If it has to be reported, at all, it goes on his own return. If your dependent child is under age 19 (or under 24 if a full time student), he or she must file a tax return for 2020 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,400 (2020).
2.          Unearned income (interest, dividends, capital gains, unemployment) of more than $1100.
3.          Unearned income over $350 and gross income of more than $1100
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2100 ($12,400 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

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.

In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.

*Technically the 1098-T does not get reported on anybody's 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 deduction or possibly your student has taxable scholarship income.  You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. 

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)

[Hal_Al]

It appears that AL has a $4000 filing threshold.

https://revenue.alabama.gov/wp-content/uploads/2021/01/20f40bk.pdf  (page 5)

State Filing Requirements: https://ttlc.intuit.com/questions/2903200-do-i-need-to-file-a-state-return