Is my logic correct on what to report as taxable for the student with full scholarship?

[f_comm_tt]

My son received a full scholarship for undergrad studies, his 1098-T box1 = $2,127.44 and box5 = $11,765.

I have withdrawn from ESA/529 plan the amount of the scholarship equal to $11,765, for which he received a 1099-Q listing basis = $5,765 and earnings = $6,000.

I am confused as to what to report where, I wonder if he will have these two taxable entries.

1) [removed].44 = 9638 (scholarship - qualified tuition, going to line 8r of Schedule1)

2) 6,000 earnings from ESA/529 withdrawal (going to line 8z of Schedule1)

how can I report this correctly in tt desktop?

Thank you.

[KrisD15]

You can enter the 1099-Q and 1098-T into the dependent student's TurboTax program since there is no education credit involved. The program will determine the taxable income he might need to report. 

REMEMBER a distribution from an education savings account can be used for room and board, making that amount (the amount that paid for room and board) not taxed. 

Even if the student lives at home, there are room and board expenses which you can apply against the distribution. The Room and Board expense cannot be larger than what the school would charge. Contact the school to find out the amount they would charge, the average is 12,986. 

There is no penalty on the distribution since the student earned a scholarship for that amount in the same year.

Also, remember that Box 1 on a 1098-T only reports tuition. There may be books and supplies that the student also paid for and those expenses count against the scholarships.

If the student has no other income and the taxable income he needs to claim (after room & board and additional expenses are taking into account) is 14,600 or less,  he would not be required to file. 

Pub 970

Topic 551

[Hal_Al · Accepted solution]

There is a tax loop hole available where the parents of students on scholarship can still claim the education/tuition credit.  Since you didn't mention the credit, I'll assume you are not eligible for the tuition credit (your income is too high) or $2127 of the scholarship is restricted to being using for tuition. 

Some of your math and logic  correct is correct.  $9638 of the scholarship is taxable going to line 8r of Schedule1. 

But the  $6,000 earnings from ESA/529/QTP distribution is not fully  taxable. You can allocate room and board (R&B), books and a computer to it.  The net amount will go on  line 8z of Schedule1.  There will be no 10% penalty because of the scholarship exception. R&B count even if the student lived off campus or at home. 

You may think that room & board were paid by the scholarship. But that's not how the tax accounting goes.  R&B are not qualified expenses for a tax free scholarship, but they are qualified for QTP distribution. 

So, assuming you had about $9638 of those other expenses; 9638 / 11765 = 81.92% of the QTP distribution is qualified.  18.03% is non qualified. $6000 x 0.1803 = $1085 taxable earnings.  The scholarship exception still applies. 

Q. How do you enter that in TurboTax?

A. Enter the 1099-Q first, in the 1099-Q section. Later, enter the 1098-T in the Educational expenses section and follow the interview, remembering to enter room & board, and books and a computer (if you have those expenses). In addition to entering numbers, you must complete the “Education Information” sub-section. In particular, be on the lookout for a screen “education expenses used for a tax credit”. It will usually be prepopulated (sometimes with $10K instead of the more appropriate $4K, or $2127 in your case). You can change it for the amount you want to allocate to the ed credit, including changing it to $0. If you don't get that screen, check the student information worksheet. You can change it there (line 17). Make the change in the first column.  

That's theoretically how it's suppose to work. Reply back, if it doesn't work (or you would like the workaround in advance).

[f_comm_tt]

This is really helpful. Thank you so much! Your answer is spot on regarding the concern about whether R&B will qualify for QTP distribution after receiving the scholarship. Thanks again!

[f_comm_tt]

@Hal_Al 

First off, thank you for your time.

It turns out we are eligible for the education/tuition credit based on our MAGI, what would be the steps to claim it as a parent with a student on a scholarship using TT desktop?

Thanks again.

[Hal_Al]

Earlier I said "In particular, be on the lookout for a screen “education expenses used for a tax credit”. It will usually be prepopulated (sometimes with $10K instead of the more appropriate $4K, or $2127 in your case). You can change it for the amount you want to allocate to the ed credit, including changing it to $0."

You don't change it to 0. You leave it at (or change it to) $2127, to get the credit.

For more specific advice, provide more numbers. Do you have expenses for books and a computer.  How much is your room and board. 

[f_comm_tt]

@Hal_Al 

Thanks for helping me.

These are my numbers:

1) Qualified purchases / Computer expenses = 1527

2) Scholarship = 12265

ESA withdrawals = 13791 (1+2)

Tuition and Fees expenses = 3213 (not sure why this doesn't match 1098-T Box 1)

R&B expenses = 6291

1098-T Box 1: 2127

1098-T Box 5: 11765

I think these would be all the numbers involved, please let me know if there is any other I could provide?

[Hal_Al · Accepted solution]

The student reports all of his scholarship ($11,765) as income, freeing up all expenses for the tuition credit and QTP distribution.

You claim $4000 of qualified expenses*  for the tuition credit. That leaves $7031 ($3213 + 1527 + 6291 - 4000 = 7031) for the QTP distribution.  7031 /11765 = 59.76% of the distribution is qualified. 40.24% is non qualified. 0.4024 x $6000 = $2414 of the earnings is taxable (on his return, since the 1099-Q was in his name).

Yes, the taxable scholarship goes to line 8r of Schedule1 and the taxable QTP earnings  to line 8z of Schedule1.

How to enter in TurboTax?  Shortcuts are highly recommended.  On your return, enter a 1098-T with $4000 in box 1 and 0 in box 5. On his return, enter the 1098-T with 0 in box 1 and $11,765 in box 5. 

After entering the 1099-Q, on his return, when asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS).  Enter the student's name when asked.  A few screens later, you'll get one simple screen to enter all the expenses. Press Done at the 1099-Q summary screen, to get there. Also enter $4000  the box "Tax-free assistance".  This reports the earnings as taxable and claims the scholarship/tuition credit exception. You do not have to deal with matching the  complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception. 

*The 3213 tuition & fees + $1527 qualified purchases  is qualified expenses for the credit. 3213 = 1527 = 4740  > 4000.

Do you have the box 2 ($6000) and box 3 $($5765) numbers right on the 1099-Q? Usually the round number is in box 3 (basis). 

[f_comm_tt]

@Hal_Al 

Thank you so much for your detailed response.

In answering your question about the 1099-Q, unfortunately, I had to calculate the numbers for Box 2 and Box 3 myself.

The form itself only includes Box 1 values (distributions), likely because these are ESA withdrawals and there was no requirement at the time. To make matters worse, it also includes transfers to a 529 in the same Box 1, which I have chosen to ignore.

[f_comm_tt]

@Hal_Al

First off, thank you for your time.

After entering the information in the student's filing, I have the following questions:

Question 1:

Why is the amount $11,765 used in the QTP distribution calculations below, considering that the total ESA withdrawals were $13,765?

This leaves $7,031 ($3,213 + $1,527 + $6,291 - $4,000 = $7,031) for the QTP distribution.
$7,031 / $11,765 = 59.76% of the distribution is qualified.
40.24% is non-qualified.
0.4024 × $6,000 = $2,414 of the earnings is taxable (on his return, since the 1099-Q was issued in his name).

Question 2:

Could I have entered something incorrectly? It appears that the earnings are not being factored into the calculations, as the taxable amount remains $2,897 regardless of the earnings I enter.

Background Information:

When entering the 1099-Q information, it seems that the earnings amount is not influencing the final calculations, leading to a fixed taxable amount of $2,897. (Note: I am entering 11765 as the Gross Distribution value, due to it being used in the calculations, see Question 1)

Observations:

1. It is somewhat confusing that, when entering student expenses, the system labels them as "Non-dependent student expenses."
2. The following expense amounts were entered:
   • Tuition: $3,213
   • Room & Board: $2,291 ($6,291 - $4,000)
   • Computer & Other Expenses: $1,527

Question 3:

It appears that the Kiddie Tax will apply—should this be expected?

Thanks again for your time.

[Hal_Al]

Q. Why is the amount $11,765 used in the QTP distribution calculations below, considering that the total ESA withdrawals were $13,765?

A. I did not note that you changed that number. I'm still not seeing 13765, but I do see 13791.  But, that's academic. The math is the same.  It's essentially just an example to show you how the calculation is done so that you have an idea of the expected outcome. 

Q. It appears that the Kiddie Tax will apply—should this be expected?

A. Yes. The taxable portion of the ESA earnings is unearned income

Q. Could I have entered something incorrectly?

A. Yes. Enter your unadjusted expenses. 

• Tuition: $3,213
• Room & Board: $6,291 ( Not $2,291 )
• Computer & Other Expenses: $1,527

Note: I changed something above to: . Also enter $4000  the box "Tax-free assistance" (instead of $15,765).

I also note that you changed the scholarship  amount from $11,765 to $12,265??