Rules about submitting 1098-T and being a dependent

[Hal_Al]

It sounds more like it's some of the earnings portion (box 2 of the 1099-Q) of the 529 withdrawal that's showing up on line 8z of Sch 1.  

For more specific help. provide some numbers. 1098-T, boxes 1 & 5. 1099-Q boxes 1 &2.  Total of non qualified expenses (qualified for the 529, but not the scholarship).  Is the student your dependent. Does she have any other income (how much, from what sources). Are you eligible for the tuition credit (income not too high)

[aphillips2]

1098-T Box1:  34,950, Box 5:  27,950

1099-Q #1 Box 1:  27,770, Box 2:  14,635.96 (represents 529 funds paid to me)

1099-Q #2 Box 1:  10,802, Box 2:  5,714.11 (represents 529 funds paid to daughter)

Non-qualified expense total:  17,787

Line 8z:  5,231

Student is my dependent

Only other income for my daughter are dividends of 123.41

We are not eligible for tuition credit

[Hal_Al]

Q.  I expected that she would be paying taxes on the excess portion of the fellowship (if it was high enough to require her to file).

A. There is no excess if the 1098-T  Box 1 exceeds Box 5, unless she elects to declare some of it taxable to free up more tuition for the 529 distributions.   She can only do that if the scholarship is not restricted to being used for tuition.

Is the scholarship unrestricted?  If so, she can declare enough of it taxable that neither of the 1099-Qs will be taxable.  And she will pay not tax, because the taxable amount will be less than her standard deduction*. 

Q. Instead, the excess is showing up on my return as other income (Schedule 1, Part 1, line z).  How do I choose to move this "off of my return" in TurboTax?  

A. Delete the 1098-T.  But, I don't think that's what you are seeing. $5231 sounds about right for the taxable portion of your 1099-Q. 

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

[Hal_Al]

My last reply was edited to indicate where we're headed. 

[aphillips2]

Yes, the scholarship is unrestricted.

If I delete the 1098-T, how do I enter the tuition cost to offset my 529 withdrawal?  At the end I should not have anything on line 8z.  All of my 529 withdrawals are offset by tuition and other costs.  Here is the math:

Spring tuition:  20,785

Spring other costs:  6,985

Total Spring costs:  27,770

My 529 withdrawal:  27,770

Fall tuition:  14,165

Fall other costs:  10,802

Daughter's 592 withdrawal:  10,802

Scholarship applied to tuition:  14,165

Remaining scholarship to be considered for daughter's return:  13,785 (<14,600)

So, again, my problem is, how do I include enough costs on my return to justify the 529 withdrawals, without also including the full amount of the scholarship, which is what happens if I include the 1098-T?

[Hal_Al]

Q. How do I include enough costs on my return to justify the 529 withdrawals, without also including the full amount of the scholarship, which is what happens if I include the 1098-T?

A. You don't include enough  costs on your return to justify both 529 withdrawals. The 2nd distribution went to her.  If it needs to go anywhere, the 2nd 1099-Q goes on her return.  

Q.  How do I include enough costs on my return to justify my $27,770 529 withdrawal?

A. You have to tell TurboTax (TT) that the Scholarship will not be allocated to tuition, for tax purposes.  That takes a workaround. There are several.  The simple way is leave box 5 blank when you enter the 1098-T, on your return. 

Simpler yet, just don't enter the 1099-Q (or 1098-T). You are  allocating enough expenses to the 1099-Q that none of the distribution/withdrawal is taxable.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient allocated educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records (you don't need it). ! 

References:

1. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 
2. IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
3. ("IRS Publication 970, Tax Benefits for Education states: If the entire 1099-Q went to qualified expenses, room and board, tuition, etc then you do not need to enter the form." 

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For your daughter's return, again do not enter her 1099-Q. It is fully covered by expenses.  She enters her 1098-T exactly as received. Enter no other numbers (they were used on your return). When asked if any of the scholarship was used for room and board, answer yes. Then enter the amount you want to be taxable ($13,785), in the pop up box. R&B are not "qualified educational  expenses".  So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.  This will put the taxable scholarship on line 8r of Schedule 1. Since that plus her interest is less than $14,600, she will pay no tax.

[aphillips2]

Ahah!  That is the answer I needed!  Thanks so much.  I hadn't understood that I don't NEED to enter either of these two forms (T and Q).  Thanks again!