Our son received two scholarships from his university. His scholarships exceeded his tuition. He is reporting the excess amount on his 1040EZ line 1. We are now working on the parent tax form. We enter the amount from his 1098T and come to a question that asks if part of his scholarship on the 1098-T includes amounts already reported as income on his tax return. However, under the question the choices are “Yes, he had scholarship or other aid reported on a Form W-2 or Form 1099-MISC” or “No, he didn’t have any scholarship or other aid reported on a Form W-2 or Form 1099-MISC”. How should this question be answered? It was indeed reported as income on his tax form but the scholarship came directly from the school and was not on a Form W-2 of 1099-MISC.
Wow! Had to read that a few times before I got it. 🙂
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.
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 at least a half time student for one academic semester that begins during the tax year, (each institution has their own definition of a half 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)
The parents will claim the student as a dependent on the parent's tax return and:
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 ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.
Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, 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 $6200, 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 $6200, then the student should file a tax return so as to get those withheld taxes refunded.
Hi .. I wanted to let you know I have been doing research on this issue today. I have reached out to one of my managers here who can shed some light on this situation. I am waiting to hear back as he is off site currently. You can also consult with a tax professional as well which may end up being the end result, I am not for certain yet. The info that Carl provided is correct but since there are varying scenarios we want to provide you with the most accurate info. My apologies for the delay. I will get back as soon as I hear back.
Both Carl and Hal_Al have posted correct info regarding your issue. This was from Hal_Al...For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the 1099-Q can be either the owner or the beneficiary depending on where the money was sent. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient".
The 1099-Q gets reported on the recipient's return. The recipient's name & SSN will be on the 1099-Q.".. at this point I am going to refer you to our TurboTax PersonalPro team they can give you the tax advice you need in this situation. https://pro.turbotax.intuit.com/
Hey great info!
Can you please help with this. My daughter got more scholarship income than her tuition, but all of the scholarship income went straight to the school and then they issued checks to her for the extra that was not used for tuition. That being said, we would not be able to claim all of the scholarship money as income and then claim the AOTC would we? Given that the scholarship money was actually paid to the school and then the remainder was issued to her? It appears that we would no be able to claim the AOTC at all and then we would have to show the extra scholarship income that she received as income that is table on her return?
Thanks in advance for any guidance on this.
"It appears that we would not be able to claim the AOTC ..... and then we would have to show the extra scholarship income that she received as income that is taxable on her return"?
That's generally correct; but there is a loop hole* 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.
You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.
Enter the 1098-T, exactly as received, on the student's return. 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 $4000. That will put all his excess scholarship as income on his return.
Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is to enter $4000 less than the actual box 1 amount, when you enter the 1098-T on the student's return or $4000 more in the box 5 amount.
* From the 2019 form 1040 instructions (pg 95): “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040, line 18c, and IRS.gov/EdCredit. Page 16 of PUB 970 (2019) actually has examples of how to do the “loop hole”.
My daughter got more scholarship income than her tuition, but all of the scholarship income went straight to the school and then they issued checks to her for the extra that was not used for tuition.
You the parent will claim your daughter as a dependent on your (the parent's) tax return. That's it. You the parent will not claim or report anything concerning education on your (the parent's) tax return.
Nobody will qualify for "ANY" education credits or deductions of any type, in any way, shape form or fashion.
Your daughter will report "ALL" the education stuff on her own return, only if she is actually required to file a tax return. She is required to file a tax return if any one or more of the below three conditions are met.
- If your daughter has more than $1,050 of investment income, then she is required to file a tax return and report all income from all sources. That includes the scholarship money, meaning that your daughter will deal with it all in the education section of her own return.
- If your daughter has more than $400 of self employment income, then she is required to file a tax return and report all income from all sources. That includes the scholarship money, meaning that your daughter will deal with it all in the education section of her own return.
- If your daughter has W-2 income. Add that W-2 income reported in box 1 of the W-2 to the amount of the physical checks she received from the school. If the total exceeds $12,300, then she is required to file a tax return and report all income from all sources. That includes the scholarship money, meaning that your daughter will deal with it all in the education section of her own return.
If your daughter is required to file a tax return, then she will be taxed on the excess scholarship money that she was paid in 2019, and "that" money will be taxed at the parent's higher tax rate. So she will be contacting you for information from your own tax return which you will need to provide her.
Do you know how the kiddie tax on form 8615 plays into this scenario? As I understand it, the taxable scholarship funds that she includes as income on her return would be taxed via form 8615?
@tonybeo - Yes scholarship income is subject to the kiddie tax, but it has a "dual status". It is not earned income for purposes of the kiddie tax, but is earned income for purposes of the dependent's standard deduction calculation. So, the first $12,200 is not taxed.
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