How much of college scholarship taxable?

[sroussak]

As a first-time filer for a college student daughter, I'm more than a little confused!

Just to use round numbers, suppose total tuition plus room & board is $65,000, broken down between $40K tuition and $25K other.  She gets total scholarship of $55K and the scholarship is applied in full to the tuition, meaning we pay $10K towards room and board etc.  So the 1098-T shows $40K (again, just rough numbers).

Am I correct then in saying that the $15K balance of the scholarship is taxable?  Is this reported on an IRS form anywhere or do I just calculate it from her financial aid worksheet?

And does this come up in the series of questions about college expenses and scholarships and the Form 8615?  (I ask because I started with another online service which first, asked the questions about taxable scholarships in the Income section, but then second, didn't allow for the 8615 election to use parents tax rates so I switched to Intuit.). I see questions about scholarships for tuition but not for other expenses but I'll go back if that's the place to look.

Thanks

[SusanY1]

Yes, the amount of scholarship that is used for room and board is taxable income.  It is taxable on the student's own return, not the parents (and in many cases, results in little to no tax.)

When entering the 1098-T on the students return, TurboTax will calculate the taxable amount after you answer the interview questions and indicate the amount that is not for tuition, required fees, or books.  

Near the end of the TurboTax interview for this section there will be an opportunity to add in additional expenses (such as books, supplies).

[sroussak]

Thanks for the reply.  I'm still confused however because there's nothing on the 1098-T that indicates what the Room&Board scholarship was - it shows only the tuition amount (the $40K in my rough example), not the $15K.  Do I just go by my daughter's financial aid statement in responding to TT's questions, since that has numbers outside the scope of the actual 1098-T form itself?

[Hal_Al]

Yes, based on the numbers you provided, she has $15,000 of taxable scholarship income. You should be  be able to reduce a little by entering the cost of books and other required materials including computers (but not room & board).  There is a place for this, in the interview. There is no additional tax form. You use the 1098-T and your own financial records.  Your are further correct that form 8615 does come into play.

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 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 your numbers as  an example: Student has $55,000 in box 5 of the 1098-T and $40,000 in box 1. At first glance he/she has $15,000 of taxable income and nobody can claim the American opportunity credit. But if she reports $19,000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

[SusanY1]

My apologies that I didn't clarify that.   The room and board doesn't need to be entered - TurboTax will assume that the difference between the scholarship amount and the tuition is taxable although during the interview you can indicate what other expense that are considered "qualified" - certain books and supplies - were paid with the funds, which will reduce the amount of the taxable scholarship income.  

[sflores55]

I am hoping you could help me better understand how this American Opportunity Credit "loophole" works. These are the figures listed on my daughters 1098-T - Box 1 lists $6,795 and Box. 5 lists $12,309. So at first glance she has a taxable income of $5,514 ( TT also lists that she must file her own return because of this) and we are not eligible for the American Opportunity Credit.  I believe your suggestion is that she reports a certain amount as Income ( on her return), and then we would reduce the Box 5 ($12,309) amount by the number that she reports as income on our return.  At some point we will then be eligible for the American Opportunity credit, by following this method.  Is that correct? 

[Hal_Al]

It takes $4000 of qualified expenses (tuition, fees, book) to get the maximum American Opportunity Credit (AOC).

So, you need to report $4000 of expenses on your return. 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. 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 makes $9514 taxable on her return (you may be able to reduce that by entering book expense). If that's her only income, she will not owe any tax

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 on the student's return.

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on her return, with 0 in box 1 and taxable amount ($9514) in box 5.

[sroussak]

Thanks, to you and Hal_Al.  The numbers on the 1098 don't seem to relate to the numbers on her financial aid statement but I'll figure it out somehow.

As a follow-up question:  regarding the Coronavirus Economic Impact Payments under the CARES Act - since we didn't get a payment for her (because she's over 17), can it be worthwhile to have her file a return as a non-dependent, in which case at her level of income she would get only a portion of the AOTC but collect all $1200 of the CARES Act payment?  (Is claiming a dependent optional?  I've never had that issue before of course).  At my income level I'm not getting the full benefit of AOTC anyway.

Thanks