Who enters the 1098-T on their return my son or me (parent)?

[mbeierm]

My daughter is paying her own way through college.  She was a freshman in 2019–18 years old.  She received scholarships and grants.  She also works part-time.  Does she claim 1098-T on her return?  Does she claim all Scholarship/grant money she received?

[Carl]

There are two completely separate and unrelated determinations that must be made first and foremost.

First, who qualifies (if anyone) to claim the student as a dependent on their tax return?  At this point, this has nothing what-so-ever to do with who claims the education stuff.

 If on Dec 31 of the tax year the student was:

 - Under the age of 24 and;

 - Enrolled as a full time student for *ANY* *ONE* *SEMESTER* that started in the tax year (this would include their last semester in high school) and;

 - Was enrolled in a course of study that will lead to a degree or credentialed certification (a high school diploma is a credentialed certification) and;

 - Was enrolled in an accredited institution and;

 - Did not provide more than half of their own support (all third party income such as scholarships and grants *do* *not* *count* for the student providing their own support) then:

The parents qualify to claim the student as a dependent on the parent's tax return. So if the student is required to file a tax return then the student must select the option for "I can be claimed on someone else's tax return." Period. End of Story.

Now understand this - the key word here is *QUALIFY*.  So if the student qualifies to be claimed as a dependent on someone else's tax return (usually the parents') then it *DOES* *NOT* *MATTER* if the parents actually claim the student as a dependent or not. The student is still required to select the option for "I can be claimed on someone else's tax return".

Now some things I want to point out about the above five requirements for the student to qualify as a dependent.

 - There is NO REQUIREMENT for the parents to provide the student any support. Not one single penny. The support requirement is on the student, and *only* the student.

 - There is NO LIMIT on the student's income. The student could earn a million dollars (literally!) and still qualify to be claimed as a dependent on someone else's tax return.

 - There are only two possible ways that the student can provide more than half of their own support.

   1) If the student was self-employed or had a W-2 job in the tax year, and earned enough money to justify a claim to having provided more than half of their own support for the *ENTIRE* tax year (every single day), and that student's earned income does not exceed the total of "ALL" third party income (scholarships, grants, 529 distributions, gifts from Aunt Mary, money from mom and dad, etc.)

   2) The student is the *PRIMARY* borrower on a *qualified* student loan, and sufficient funds were distributed to the student in the tax year, and the total distributed funds *do* *not* *exceed* the total of all third party support received (identified above).

Finally, take note that when a student is claiming to have provided more than half of their own support and have the earned income or borrowed money to support their claim, their cost must be reasonable. For example, an undergraduate can not justify a $5000 a month penthouse suite as a necessity for them to attend college.  Likewise, steak and eggs for breakfast with steak and lobster for dinner and lunch every day isn't going to cut it either. A $40,000 Tesla for transportation will definitely raise flags with the IRS too.

So the first two questions you have to answer are these:

1) Do you qualify to claim the student as a dependent on you tax return?

2) If yes to the above, then are you actually going to claim that student as a dependent on your return?

[Hal_Al · Accepted solution]

As the other answer indicates, it can be complicated. These are the simple answers.

Q. Does she claim 1098-T on her return***?  

A.  No. You claim it on your return, because she is your dependent*.

Q. Does she claim ALL  Scholarship/grant money she received?

A. No. She claims only the portion that exceeds qualified educational expenses plus the amount you use (usually $4000)** to claim an education credit. 

*Scholarships & grants are considered third party support and not support provided by the student.  She, almost certainly, still qualifies as your dependent. 

**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.

***There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. The student cannot be supporting yourself on parental support, 529 plans or student loans & grants. He usually must have actually paid tuition, not had it paid by scholarships & grants.  It is usually best if the parent claims that credit.  He cannot claim a credit if he is, or can be, claimed as a dependent by someone else.