We claim our daughter on our taxes. However, since she has scholarship that has to be reported as income from a 1098T, we have to file that 1098T on her return.

[Heather14]

I will definitely update my answer. Thank you very much for that information. I will also edit the information shared from the FAQ, and include the information from the IRS link instead.

[Carl]

I just checked and learn something from your post too. I didn't realize that 1099-Q qualified R&B expenses were limited based on the student's specific situation. Interesting! Now I've got to update what I have.

[keschiller5]

Thank you both for your feedback.  I see the error in my thinking there.  It looks like since my daughter is not eligible for any education deduction or credit because we claim her, that I should adjust the amount of her "qualified education expenses that are used to calculate deductions and credits".  It appears that tt was applying her QEE to figure her credits instead of toward her 1099Q.  The scholarship was not the problem.  Since she is not eligible for any education credits, it does not make sense to apply those QEE toward those credits.  I am I on the right path?

[Carl]

Sometimes I'm wary to post "everything" I have. But I find that for many it saves time by giving them the big picture all in one shot. Glad it worked out for you the way I hoped it would.

[keschiller5]

Took me a little to read and think it through, but it was much appreciated.

[dfoguadgjl]

Hi Carl, I wonder whether you can answer me this question: It is not as simple as it looks. My child, who is my dependent, has excess scholarship in his 1098-t and turbo tax interview asks me how much of the scholarship money was paid for non educational expenses. The bursar office received the college aid funding and our own on-line payment at the same time and randomly applied the payments to various items of my child bill. The college aid is not restricted. I know how much of the scholarship the bursar applied towards room and board because the bursar sent me detailed ledger. The question is whether I can ignore that ledger, and split it in turbo tax between education and non education the way that is most beneficial to me tax wise? Specifically, suppose the bill was $10,000 tuition and $10,000 room and board, and it was paid using $15,000 college aid and $5,000 on line payment by us. Ideally the bursar would have applied $2,000 of our money towards education and the other $3,000 of our money towards room and board; and would have applied $8,000 of the aid money for education and $7,000 of the aid money for room and board. Then we would get maximum education credit and only $7,000 of the aid money would be taxable income to my child. But instead the bursar used $5,000 of our money for education; therefore $10,000 of the college aid was used for room and board and becomes taxable income to my child. Can we ignore the random way in which the fundings were applied and still claim that only $7,000 of the scholarship money was used for room and board (and the other $8,000 of the scholarship used for education)?

[Carl]

Unfortunately, you can't just divide things up in the most convenient way for you. Well, you could. But if audited you would most likely lose. I know people to do it and have never been audited. For them it's no problem. But then, it's my bet that the ones who do what you and then never "get back and let us know" are to embarrassed to admit we were right.
Basically, any scholarship money applied to room and board is taxable. Period.
Grant money that is applied to room and board may or may not be taxable. A grant can be specified as to what that money is for, by the grantor. Sometimes the grantor will specify that the funds can be used for qualified education expenses, as well as those unqualified expenses "directly related to the educational pursuit". Room and board would be directly related to the education. Of course, if the student is going to college in the home town and moves out of mom and dad's house just to get their own place, that's not in direct support of the education. So that could be questioned.
Whereas per the IRS rules, 529 funds can be used for qualified education expenses *and* room and board for the student in direct support of that student's education.
But generally speaking, if the amount in box 5 of the 1098-T exceeds the amount in box 1 or 2 of the 1098-T, then while the parents will claim the student as their dependent if they qualify, it is the student that will report all the education stuff on the student's tax return. The parent's will report nothing past claiming the student as a dependent. But you already know this of course.
bottom line is, the IRS has a certain order in which the IRS applies funding.
 - First, all scholarships and grants are applied to qualified education expenses. (room and board is not a qualified expense). Then if there's any excess it's taxable income to the student.
 - Next, 529 funds are applied to qualified education expense if not all covered by scholarships/grants. Then any remaining 529 funds are applied to the unqualified but allowed room and board expense. After that, any excess is taxable income to the student.
 - At this point, if all qualified expenses have not been paid in full by scholarships, grants and/or 529 funds, then, and only then are out-of-pocket expenses applied. As you know, out of pocket expenses for room & board do not qualify for a deduction of any type.
So if you're trying to shift some of the 529 funds used to pay tuition, to the room and board stuff so you can claim qualified out of pocket expenses, you'll get away with it just fine, until and if you get audited. If that happens, then all the back tax, interest, late fees, fines and penalties will make your manipulated tax savings seem like a pittance in comparison.

[dfoguadgjl]

Thank you so much Carl for your very thoughtful response! Just to be clear, we don't have 529 or anything else. Only FINANCIAL AID provided by the college and also a MERIT scholarship provided by the college. Both are sent from the college directly to the bursar office of the same college. So: 1. You are saying that no matter what the bursar office did, I should still not claim any educational expenses, right? That I cannot decide what part was used for qualified education expenses and what part was applied toward other expenses (and so taxable). And also 2. when my child inputs the 1098-T in his own tax return, then his taxable income due to the 1098-T should be the scholarships, minus the college educational expenses, minus our out of pocket costs of text books, right? Even though the scholarships never actually paid directly for our out of pocket text books, since the bursar naturally applied the scholarship to charges on my student bill which included education and room and board? Finally, do you know if my child should report this taxable income also to the state in which the college is located, which in this case is Illinois? My child is not a resident of that state. Thank you very much!

[dfoguadgjl]

Hi Carl, I read your answer again and would like to clarify: I am not trying to shift any 529 and we don't have 529. We do have college financial aid grant and college merit scholarship. Both not restricted. So I am trying to shift part of the scholarships fundings to the room and board so that my child will file tax on them but II can claim educational expenses. Overall we still gain then.

[Lashan503]

This information is very helpful. I would just like to clarify something. If I am entering my dependent's 1098-T on my tax return but my dependent used a portion of the grant to pay for room and board which that portion needs to be shown as taxable income, does my dependent also enter the 1098-T info on his return although I am already receiving a credit for this? To give some further details my dependent did select "someone is claiming me on their return" on his return. 

[Hal_Al]

Q. Does my dependent also enter the 1098-T info on his return although I am already receiving a credit for this? 

A. Yes. 

Enter the 1098-T, exactly as received, on the student's return. Enter book & computer expenses separately.  In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is the amount you used (usually $4000). That will put all his excess scholarship as income on his return.  

Be advised some people last year said they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s interview.  Check the student information work sheet (part VI, line 17) to verify it was entered.  If not, the alternate workaround is  to enter $4000 less than the actual box 1  amount, when he enters the 1098-T. 

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount  in box 5. In that case, the amount in the  "Amount used to claim the tuition deduction or credit" box is 0, if you get that screen. 

[Lashan503]

Hello, I'm not following why I need to enter $4,000 as his room and board grant was only $2075 and the rest was used for qualified education expenses. Can you explain?

[Hal_Al]

Q. I'm not following why I need to enter $4,000 as his room and board grant was only $2075 and the rest was used for qualified education expenses. Can you explain?

A.  You said you are "already receiving a credit for this". $4000 of tuition is the usual amount needed to get the maximum American Opportunity Credit (AOC or AOTC).  So when calculating how much of his scholarship is taxable, that $4000 must be taken into consideration.  "the rest was used for qualified education expenses" may not be an accurate statement. 

The $2075 room & board (R&B) scholarship is not a standalone number.

Total scholarship (including the $2075) less NET Qualified educational expenses (QEE) equals the taxable scholarship income.  R&B are not QEE.  "Net" qualified expenses is total QEE  less the amount used to claim the credit. 

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student?

[Lashan503]

@Hal_Al here are my responses to your questions in blue:

Provide the following info for more specific help:

• Are you the student or parent. I am the parent
• Is the  student  the parent's dependent. Yes the student is my dependent
• Box 1 of the 1098-T- $32,200
• box 5 of the 1098-T $18,585
• Any other scholarships not shown in box 5 No
• Is any of the Scholarship restricted; i.e. it must be used for tuition- I'm not totally sure how to determine that, but the scholarship comes from the school and the room grant of $2075 is from financial aid so I would say yes it's restricted to education expenses and room and board. 
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers- I did purchase him a new laptop in 2022 for about $300 but I haven't included that on either of our return. Should this be included on both returns also or just mine?
• How much taxable income does the student have, from what sources- student's taxable income totals $7,421 from a retail store and a maintenance job. 
• Are you trying to claim the tuition credit (are you eligible)? Yes I am claiming the tuition credit and I am eligible. 
• Is the student an undergrad or grad student? Undergrad student

[Hal_Al]

You have plenty of expenses. He does not need to report the R&B scholarship as income.  He is allowed to said it was used tp pay tuition.  You do not have to match specific funds to expenses.  You just need to have more expenses than funds. He does not need to file anything to claim this. 

$32,200 - $18, 585 = $13,615.  Less $4000 used to claim the credit = $9615 of qualified expenses that can be covered by other sources (including a room & board scholarship).