How to split a 1098-T between parent and student for excess scholarship/grants

[GaryJay1]

I am in desperate need of some help and would soooo appreciate someone explaining this situation to me.

So my 19 year old son (who is a dependent on our income tax return), just received a 1098-T from his college that correctly shows (I'll use round numbers) 3,000 in grants/scholarship (Box 5) and $1,500 in tuition (Box 1). The money is box 5 that exceeds box 1 should be reported as taxable income as it is all for one calendar year (2023).

It is my understanding that in this situation, the parent can put on their tax return just the amount of grant income up to the break even point (in this case, my tax return would show $1,500 in grants and $1,500 in tuition). Then the excess would be somehow reported by my son on his tax return (he already need to file for his work at McDonalds) so the tax on the excess grants of $1,500 would be shown on HIS tax return and he would pay tax at his lower tax rate for the $1,500 excess.  But this is where it gets confusing as I use my Turbo Tax program.  I've seen some explanation about this but none I can make sense of.

If my example above is correct ($1,500 tuition/$1,500 grants on my return and $0 tuition/$1,500 grant on his), how do I do this?  Can I enter the 1098-T amounts on my tax return as well as his tax return but somehow  on another line adjust the amounts so somehow MY return shows $1,500 in tuition and grants yielding zero excess. And then make an adjustment of the same 1098-T put on his return showing no tuition and $1,500 in grants?   OR, do I have to put the 1098-T on either my tax return OR his. And if only on one, how would I handle this in the Turbo Tax program on my return to show no excess grant on mine but get the excess grant amount on his?

I am really at a loss because most of what I have seen in answers on-line doesn't give me clear instructions on where in Turbo Tax to enter the amounts on the two returns to make this work. I can really use help and a clear explanation of how a parent and dependent would handle this.

[Hal_Al · Accepted solution]

Q. Can I enter the 1098-T amounts on my tax return as well as his tax return?

A. Yes, if needed. 

Q.  It is my understanding that in this situation, the parent can put on their tax return just the amount of grant income up to the break even point (in this case, my tax return would show $1,500 in grants and $1,500 in tuition).  Right?

A. No. Unless you are claiming an education credit, you do not enter the 1098-T, on your return. He would enter it on his return and TurboTax (TT) would calculate the difference between box 1 and box 5 as taxable income ( reduced by any additional book and computer expenses).

But, wait, there's more. 

There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. 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 conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $3000 in box 5 of the 1098-T and $1500 in box 1. At first glance he/she has $1500 of taxable income and nobody can claim the American opportunity credit. But if she reports $3000 as income on her return, the parents can claim $1500 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. The parents would then claim $2500 of expenses for the tuition credit. It take $4000 of expenses to get the maximum $2500 credit. $1500 of expenses get you a $1500 credit; $2500 of expenses gets you $2125. It's 100% of the first $2000 and 25% of the 2nd $2000. 

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.

Q. How to enter that  in TT?

A. It's best to use a short cut. Using the 2nd example ($2500 total expenses and $3000 scholarship). The parent enters the 1098-T with $2500 in box 1 and box 5 blank. The student enters the 1098-T with $0 in box 1 and $3000 in box 5. TT reports the scholarship income ($3000) on line 8r of Schedule 1, of his return. 

[GaryJay1]

Also, rather than reporting it as taxable income, a add on question you may know about.

My son just finished his community college education and has $1500 excess Pell grant funds (grant exceeded tuition and books.)  He is now starting his remaining 2 years to get his bachelor's degree at a 4 year college. If he receives Pell grants there, it will not fully cover the cost of tuition.  Can I (and my dependent child) choose to NOT report the $1,500 excess as taxable income in the year it was awarded if the excess definitely will be used for tuition for the following academic year at a 4 year college.

[Hal_Al · Accepted solution]

Q. Can I (and my dependent child) choose to NOT report the $1,500 excess as taxable income in the year it was awarded if the excess definitely will be used for tuition for the following academic year at a 4 year college?

A. No. Grants/scholarships must be matched with expenses , in the year it was received.