Scholarship and 1098-T

[ViS]

Hello, I have read a lot of information about this topic,but my situation is very specific.

Last year my daughter received approximately 15,2K in scholarship and grants. Form 1098-T is showing box 1 as payments received of $11,9K.  Her actual  tuition for 2018 was $13,8 K. And because her grants/scholarship  for 2017-2018 was less then 2018-2019, we had to pay $1800 out of packet for Spring semester of 2018. Payment was made in December of 2017. Because they grant scholarship/grants on semester base-her spring semester scholarship was smaller, and fall semester was higher. In Fall semester of 2018 we received a refund of $3,300.  I have the following questions:

1. Cash payment of $1800 was not included on the form 1098-T because technically it was made in December of 2017, but for Spring 2018. Did the university do it right?  Since we have excess of scholarship of $3300,can I deduct that $1800 from the taxable amount? 

2. I do not remember exactly where did we report 1098-T form- on her tax return or mine. I believe there is a question in TurboTax online if someone claims her as a dependent and that eliminates her option of entering that form. Tax documents don't have records of that form being entered anywhere. I know for sure we did not claim any additional income(that $3300). So I am looking into amending the taxes, but don't know who's should I amend as I'm not sure how to determine where the form was entered.  We claim her as our dependent.  Who this additional income should be reported by-by her or us? She made $4,300 working during summer. If she reports that additional $3,300, that leaves her under $12,000 tax paying requirement- is there even a point of amending them since she will not owe any taxes? 

3. If us (parents) or she has to report that leftover money we received-how much I should report? We spend approximately $1000 for books and other supplies (qualified). She lived with us and I know that room, and transportation is not qualified expenses. I don't have receipts from school or stores for each purchase. Can I still deduct this amount from total and not include it in income?  If I am able to deduct $1000 spent for supplies, and if the $1800 we prepaid in cash can be counted towards tuition for 2018, we have left $500 as income. Should I bother reporting it on amended form? 

Thank you.

[Carl]

After you enter the 1098-T, later screens will ask for information that was not included on the 1098-T. Here's the basics, followed by the full gist I've "translated" into plain english right out of IRS Publication 970.

 - Schoarships, grants, 529 funds are reported as taxabile income *INITIALLY* in the tax year they are received. It *does* *not* *matter* what tax year that scholarship, grant or 529 distribution may be for.

 - Tuition, books and lab fees are claimed in the tax year they are paid. It *does* *not* *matter* what year is paid for.

So if you paid a qualified expense in 2017 it's reported on your 2017 tax return. Period. Amend if necessary. It's only necessary if it will make any difference to your tax liability. With $1,800 out of pocket, if that expense is a qualified expense, it most likely "will" reduce your tax liability. So it's worth amending.

Now for 2018 and 2019, understand that out of pocket education expenses are no longer deductible, as the tuition deduction expired at the end of 2017 and congress has never renewed it. But those expenses "may" qualify you for some credits on the 2018/19 taxes. (key word, *MAY*)

College Education Expenses

Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:

 - Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*

- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.

Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”.  The first one indicates a choice. The second one provides no choice.

Now there are two separate determinations to be made here.

• Who claims the student as a dependent.
• Who reports all the education expenses and claims all the education credits.

First, who claims the student as a dependent?

If the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a full time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

Then:

The parents qualify to claim the student as a dependent on the parent's tax return . Period, End of Story. But one thing I want to point out here. The parents *QUALIFY* to claim the student. The parents are *NOT* required to claim the student as a dependent. But even if they don’t, since they *qualify* to claim the student, then if the student will be filing their own tax return the student is *REQUIRED* to select the option for “I can be claimed on someone else’s return”.  To reiterate:

If the student qualifies to be claimed on the parent’s tax return, then the student can not take the self-exemption on their own tax return, no …matter…what.

Who reports all the education expenses and claims all the credits?

If (and only if) the parents qualify to claim the student as a dependent, *and* the parents actually are claiming the student as a dependent, then:

The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:

The parents will claim all educational tax credits that qualify.

If the student will be filing a tax return and:

The parents qualify to claim the student as a dependent, then:

The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option even f the parent's qualify to claim the student as a dependent, and the parents do not claim them.

Here’s when the parents will claim the student as a dependent, but the parents will NOT claim any of the education expenses or report the 1098-T on the parent’s tax return.

.If the amount of scholarships/grants/529 funds exceeds the amount of qualified education expenses,  then the student will report the education stuff on the student’s tax return. The parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.)  Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.

In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.

 If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $12,000 (12,350 for the 2019 tax year), then the student doesn’t even need to file a tax return, and nothing has to be reported.

If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.

Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $12K, then the student should file a tax return so as to get those withheld taxes refunded.

1099-Q Funds

 First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to and included in the total on line 7 of the 1040.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is included in the total on line 7..

Finally, out of pocket money is applied to qualified education expenses. However, take ***SPECIAL*** ***NOTICE*** that the tuition and fees deduction expired at the end of the 2017 tax year and was not renewed for the 2018 tax year. It’s unknown if it will be renewed for the 2019 tax year. If it is renewed for the 2019 tax year, the only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money. As of this writing, (3/26/2019) congress has not renewed the out of pocket expense deduction, which expired in 2017.

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over, the left over excess is taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.

[Hal_Al]

The $1800 you paid, in December 2017,  is claimed on your 2017 tax return, even though it was for the 1st 2019 term.   You may claim a tax credit based on that amount (adjusted for any  other 2017 payments and scholarships applied in 2017). 
No, your cannot deduct the $1800 from the $3300 you received in 2018.

You are correct, there is no need for her to amend, since  her total line 1(form 1040) income is under the $12,000 standard deduction.  You are also correct that the $3300 goes on her return, not yours.

Yes, you can  deduct the approximately $1000 for books and other supplies you spent from the $3300 she would report as income.  But, there's a better way. You should claim it for the education credit, on your return. Furthermore there is a loop hole to claim some of the tuition paid by scholarship (see below).

______________________________________________________________

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 an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

[ViS]

Thank you very much for detailed answer. That is very helpful. So the reason why I am revisiting this questions is the application FAFSA that has a question 43d -Student college grant and scholarship aid reported to the IRS in your income. And I know for sure we did not include any additional income to W2  -not on parents. not on daughter's return.

From what you have provided above, here is the conclusion I came to. Please let me know if you think I misunderstood you and thinking wrong.

-From $3300 of leftovers of scholarship- taxable amount is only $2300 (3300-1000 in books and other supplies).

-Since my daughter made only a little over $4K on her W2 (from work) and she got tax refund, adding $2300 to the income will not make a difference in her tax liability and she will not owe any taxes any way; so we DO NOT need to amend her 2018 taxes.

-as far as FAFSA question- I think we should put an answer for that question as $2300. Even though this number doesn't show up on  her tax return. 

Please let me know if I'm thinking in a right direction. 

[Hal_Al]

@ViS  - I agree with everything you said.  You understand it correctly.

I want to point out one technicality, for others reading this post.  It does not affect you or your student-dependent: Dependents do not get a full $12,000 ($12,200 for 2019) standard deduction.  For 2019, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,100 ($1050 prior to 2019) or the sum of $350 plus the individual's earned income (not to exceed the regular standard deduction amount of $12,200).  Scholarship income is considered earned income for the purposes of this rule.  It is not earned income for other purposes, e.g. EIC or IRA contributions.

[ViS]

Hello, I have a question fro this year scholarship leftover.This year we have $2800 leftover of scholarship and approx. $1200 in books/supplies expenses(qualified). Can my daughter claim only $2000  as taxable income, or does she have to claim the whole $2800?

[JamesG1]

Your daughter has $2,800 in tentative scholarship income because box 5 exceeds box 1 or the 1098-T.

If she also reports another $1,200 in qualified education expenses, that should reduce the tentative scholarship income to $1,600.

Hopefully, your daughter will fall under the $12,200 filing requirement or the dependent filing requirement and not have to pay taxes on the scholarship income.

The dependent filing requirement is:

• Unearned income was more than $1,100.
• Earned income was more than $12,200
• Gross income was more than the larger of:
•    $1,100, or
•    Earned income plus $350.   [Edited 02/27/20 9:41 AM]

[C-29]

I have a similar scenario, Box 5 is higher than Box of about $6600, with eligible expenses $2300, I claim student as a dependent. we the parents are not eligible for any educational credits. Student doesn't work (no W-2), can she still do her own return, enter form 1098 and report the difference as misc income after expenses: $4300, or just don't report anything?

[NCperson]

@C-29 - don't report anything...... as long as there is no federal and  state tax with holding AND her income is the lessor of 

earned income + $350  OR $12,200

there is no need to file  (the only way to get back a withholding is to file)

[C-29]

I was doing some research: IRS gets reported of the 1098-T; is it safer to report 1098-T on parents' tax return (for information only), but do not add the difference of  $4300 (excess after elig expense) to misc income on my return, as I am not claiming any education credit, and according to my daughter's (student) income, she is not required to file her return, so she is not claiming any credits/refunds?

[NCperson]

if your student is your dependent, then the 1098-T gets reported on YOUR tax return if BOX 1 exceeds BOX 5,   If box 5 exceeds Box 1 that is taxable income to the STUDENT and goes on her return.  That is the requirement.  

However, whether your daughter is required to file a return is a separate question.  If her earned income (and the net of the 1098-T is considered part of earned income) is less than earning income + 350 or $12,200 whichever is less AND she has no withholdings, there is no requirement to file: 

example:

1098-T; $2000

w-2: $5,000 (no withholdings on the earnings)

dividends: $200

earned income = $7,000

$7,000 < $7,000 + 350 therefore no need to file (no withholdings)

I can't give you an opinion on 'safer' as there is a prescribed method. 

[C-29]

Thanks you so much for the clarification; where can I find this rule: "if your student is your dependent, then the 1098-T gets reported on YOUR tax return if BOX 1 exceeds BOX 5,   If box 5 exceeds Box 1 that is taxable income to the STUDENT and goes on her return.  That is the requirement."?  

[NCperson]

1) When you post the 1098-T into Turbo tax, watch what occurs - try it both ways (Box 1 less than Box 5 and then Box 1 greater than Box 5).  When Box 1 is greater than Box 5, you should get the AOTC credit (assuming you pass the other eligibility tests).  When it's the other way around, TT should tell you to post on the student's return. 

2) read publication 970 

[ViS]

Thank you very much for your response. The reason why we wanted to claim $2000 and report $1200 in expenses is because it will give us some amount of American Opportunity Credit. If I put the $1200 as expenses and only $1600 as taxable income, we are not getting any AOC at all. I am assuming this would be the proper way and correct way to report it?

She made approximately 3K from work, so she doesn't owe any taxes.

[NCperson]

@ViS but if Box 5 exceeds Box 1, you are not eligible for AOTC.... i am losing track of all the number flying around in this post...... can you please relist them

1098T: BOX 1 and Box 5

any other expenses not in BOX 1 that are 'qualified' (normally books required for class not purchased at college, but there could be others).