Is any of my son's college scholarship for tuition and housing taxable (and is it taxable on his 1040 or my 1040 if I claim him as a dependent)?

[Erin03]

If you have time......

I did as you said and input $4000 in Box 1 of 1098-T which is resulting in the $2500 AOC.  (Honestly I don't know how I would know to do this as just a regular TT user. )  Should I do the same for my daughter?

So while I'm trying to search down my son's W-2 I'll ask you about my daughter.

When I input her info. into my return, TT said that her 529 wasn't resulting as income so I wasn't going to file a return for her.   Below is her info:  

She received a 1099-MISC for $1300 for summer internship. No other income.

1098-T:  Box 1:  $12154

               Box 5:  $8860.

1099-Q:   Box 1:  $27400.

                  Box 5:  $16659.

Other expenses:  Room and Board:  $14404

                                Books:  $467

Thanks again Hal_Al!  

[Hal_Al]

Anything in box 7 of a 1099-Misc is considered self employment income.  Recipients with as little as $400 are required to file a tax return and pay "Self employment tax" (SET), even if no income tax is due. SET is how the "self employed" pay their social security and medicare tax. 

"When I input her info on my return, TT said that her 529 wasn't resulting as income…”

That's not correct. You've made a mistake somewhere.  So, yes, you have the same situation with your daughter: You have $36,260 ($8860 scholarship + $27,400 529plan) of tax advantaged disbursements but only $27,025 (12,154 +14,404 +467) of educational expenses. Some of that tax advantaged money is taxable.  You're also entitled to a 2nd education credit for a 2nd student (another AOC if she's an undergrad).

On your return, again enter $4000 in box 1 and leave box 5 blank, at the 1098-T screen. Enter no other amounts in the TurboTax (TT) interview. That should get you the maximum AOC.

On her return, enter the 1099-Q and complete the 529 distribution interview, before entering the 1098-T. At the 1098-T screen, enter $12,154 in box 1 and $8860 in box 5. Enter books ($467) and room & board ($14,404) when asked for books.  When asked how much of the scholarship was used for room and board, enter $8860. 

Again, you should reach a screen “education expenses used for a tax credit or deduction”.  Enter the $4000 you claimed on your return.

I calculate the taxable distribution as $2660. Note that your 529 plan distribution ($27,400) is slightly more than your total expenses ($27,025).  That means you’re gonna pay some 10% penalty on the non-qualified portion of the distribution (about $23 in “additional tax”)

[Opus 17]

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@Hal_Al wrote:

Anything in box 7 of a 1099-Misc is considered self employment income.  Recipients with as little as $400 are required to file a tax return and pay "Self employment tax" (SET), even if no income tax is due. SET is how the "self employed" pay their social security and medicare tax. 

An internship in many cases is not considered self-employment income since it is considered part of the student's education.  

It is very clear that if the internship is at the school she attends, it is not self-employment income, and should be reported as "other taxable income" and not on schedule C.

I have it in my mind that this also applies to internships that are arranged with the school, and that are required as part of the student's degree program.  But I can't find documentation of this in a short search.

If she went on her own and arranged a summer work experience that is not required by her school as part of her degree, it's probably not a qualified fellowship stipend and would be considered self-employment.  It's also possible, depending on the nature of the work, that the company should have paid her on a W-2. 

[Hal_Al]

@Opus 17  - I agree, internships can be iffy in how to report. I think  that internships, at the school,  could even be treated as scholarship income, rather than "other income".  There's also the "one time gig" exception. That said, I believe an internship, away from school, in the student's chosen field ("regular line of work") is earned income, either as a W-2 employee or contract employee (1099-Misc).

@Erin03  - Either way, a $1300 1099-Misc, means that she has to file a tax return. "Other income" is unearned income  and the $12,200 limit does not apply.  It will also not be included in the standard deduction calculation.  The IRS considers anything in box 7 of 1099-MISC to be self employment income. TurboTax (TT) aggressively steers you in that direction, even if the amount is in box 3. If you try reporting box 7 income as anything else, you chances of hearing from the IRS are very high.

That said, the key to getting TT to treat it as other income (if that's what you believe it should be) is to follow these steps:

 Enter the 1099-Misc

On the next screen Describe what the payment was for

On the next screen select "none of these apply"

On the next screen select "No it didn't involve work like my main job"

On the next screen select "I got it in 2019" ONLY

On the next screen select No, it didn't involve intent to earn money

TT will put the amount on line 8  of Schedule 1 as other income

[Opus 17]

If the daughter reports this as “other income“, the IRS may send a letter asking why it was not reported as self-employment income. The daughter would send a letter in reply explaining the circumstances, and providing any proof from the school that this internship was a required part of her degree program.  

[Erin03]

Thank you both so much.  Yes, this internship was required for her degree plan, but it was not set up by the university.  She had to find it.  She received a 1099-MISC that says:

"NONEMPLOYEE COMPENSATION 7"                            $1300

[Erin03]

But then the internship was coordinated with the university to receive credit.

[Opus 17]

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@Erin03 wrote:

Thank you both so much.  Yes, this internship was required for her degree plan, but it was not set up by the university.  She had to find it.  She received a 1099-MISC that says:

"NONEMPLOYEE COMPENSATION 7"                            $1300

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As I said, I couldn't find the guidance I was looking for that internships required for a degree are not subject to SE tax.  I think you are probably on solid ground if you report this as "other income."  But, I am not your accountant who you have hired to provide expert advice.  If the IRS sends a letter, it will say something like "You forgot to pay self-employment tax, so we are billing you $200.  If you don't think you owe the tax, send us a letter explaining why by this deadline _______" and you will make your argument.  (Don't ignore the deadline because the judgment becomes final and not subject to appeal if you just ignore it.)

[Erin03]

After removing all of her information I can't even make the 1098-T screen show up again.  

And again I apologize, but why do I put the $8860 was used for Room and Board if her scholarship money was all used to pay Tuition directly to the university?  I thought if scholarship money goes to pay R&B it is taxable?

[Erin03]

Ok. Thank you very much. 

[Hal_Al]

Q. Why do I put the $8860 was used for Room and Board if her scholarship money was all used to pay Tuition directly to the university.

A. Because telling TT that you used it for R&B is the easiest way to get TT to treat it as taxable. It doesn't matter how the scholarship money was  actually used. At tax time, it is just money in and money out. Do not try to match individual payments to individual expenses.  There's one major exception, that was explained in the replies to the original poster: if the conditions of the scholarship are that it must be used to pay tuition, you cannot treat it as taxable income, it must be treated as tax free scholarship.  Then more of the 529 plan distribution will become taxable and her tax bill goes up. In that case, answer no when asked if any of the scholarship was used for R&B. 

Q. After removing all of her information I can't even make the 1098-T screen show up again? 

A. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”.  Click edit next to the section you want to change; tuition, to get to the 1098-T screen..

[Erin03]

@Hal_Al

So I'd like to confirm one thing please.  

-On my daughter's you said when asked how much of the scholarship was used for R&B put $8860 (which is the amount of her scholarships).

-For my son you said to put $11014 when asked how much of the scholrship was used for R&B.  His scholarship amount was $14420, so I'm confused why I'm putting in a different item.  (I don't see where the number $11014 came from).

Thanks again.  Sorry to be so difficult.  😕

[Hal_Al]

Your daughter's scholarship amount plus other earned income is less than the $12,200* "magic number" (standard deduction).  Your son's is more. At that point it's best to switch to the 529 money being taxed, rather than scholarship. This was briefly explained previously. 

You're not being difficult, it's the tax rules that are difficult.  The devil's in the details, which sometimes doesn't seem to make sense. That's why tax preparation and software is a multi billion dollar business!.

*Technically the "magic number" is $11,850 (a dependent's std deduction is his earned income + $350).

(I don't see where the number $11014 came from).

12200 - 836 - 350 =11014

[Erin03]

So, in that case, maybe my son's total is now different. 

I finally got his W-2 and his total Income was $1113 rather than $836 that I thought.  He also had a bank INT of $125.  So, that changes the amount I should put in for scholarships paid by R&B?  

[Erin03]

[social security number removed]-350  = 10737  ? 

or if I include the Interest

[social security number removed]-125-350 = 10612 ?