REU Internship Stipend: Follow Up question

[spikemarbles]

Hi everyone!

Last week I posted a question about how to handle my daughter's REU Stipend. ( REU Internship Stipend) One of the things I've been hearing from other sources is that based on her income, she shouldn't have to pay any taxes on it.  However, when I enter all the forms on TurboTax, she gets hit hard.

Here's what I have:

*Although the stipend was reported in the 1098-T from her university in box 5 (Scholarships/Grants), it was for living expenses during her research time over the summer.  (The university reports it because the REU was part of the curriculum and therefore a "class.")

*The research lab also furnished a 1099-MISC reporting the amount

*As a dependent, her standard deduction is supposed to be her earned income plus +$350 (2021 tax year)

*The stipend was not meant to be used towards tuition and was essentially payment for the research work.  Therefore I'm told it should be considered earned income.  

*However, in TurboTax, the stipend is not considered in the standard deduction calculation when entered on the 1099-MISC section, and therefore results in a large tax bill. 

My questions:

1. Is the above correct that the stipend is earned income and should be included in calculating her standard deduction?

2. How do I get TurboTax to agree on that when I enter the 1099-Misc?

Thanks in advance for any help on this!

[Hal_Al · Accepted solution]

@spikemarbles said 

"the stipend was reported in the 1098-T from her university in box 5 (Scholarships/Grants)"

"The research lab also furnished a 1099-MISC reporting the amount"

That sounds like duplicate reporting.  TT can handle that (and apparently did) but it treats it as 1099-Misc income rather than scholarship income (which it is)

You want to enter the income as scholarship income, not 1099-Misc (other) income.  Scholarship income is treated as earned income for the calculation of her standard deduction (but not for some other purposes).  So, yes, you are correct, the stipend is treated as earned income and should be included in calculating her standard deduction. 1099-Misc income is unearned income and gets her a smaller standard deduction.

The simplest thing is to not enter the 1099-Misc, since the 1098-T entry treats it as scholarship.  But that risks an IRS inquiry.  You essentially have an erroneous 1099-Misc.

If you received an erroneous 1099-Misc, You have several choices:

1. Ideally, you get a corrected 1099-misc from the payer, showing 0 income (that's unlikely)
2. Don't report it on your return. Attach a copy of the 1099 and a statement explaining the circumstances. You can't e-file. From the IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.
3. Report the income as other line 8z, Schedule 1 income (enter in TurboTax at the 1099-Misc screen) .  Then enter a line 8z deduction, for the same amount.  In TurboTax (TT), enter at:
   - Federal Taxes tab
    - Wages & Income
   Scroll down to:
   -Less Common Income
         -Misc Income, 1099-A, 1099-C
          - On the next screen, choose – Other reportable income -  Answer yes to Any other Taxable Income -On the next screen, Enter the number with a minus sign (-) in front.  Briefly explain at description.
4. Don't enter the 1099-Misc and hope you can explain it away when & if the IRS contacts you

[spikemarbles]

Thank you so much!  I may try Choice 3 to see if I can preserve the ability to use TT and e-file, but I think Choice 2 might be the best option.  

[spikemarbles]

@Hal_Al 

After further consideration, I have a follow up regarding Choice #2.  

I discovered that I can go to Forms, access the Wages, Salaries & Tips Worksheet, and enter the stipend amount on Line 9b with a description.  This forces TurboTax to calculate the standard deduction using her entire earned income.  Everything looks good now.

I will then print off the forms for File by Mail and attach the 1099-MISC with a note as you mentioned.

Does this seem like a good way to handle it?

Thanks for your help!!!

[Hal_Al]

Q. Does this seem like a good way to handle it?

A. No.  That will enter it as wages. Wage and scholarship both go on line 1 of form 1040, but scholarship gets a notation (SCH####) on the dotted line.  Reporting wages that haven't been subjected to social security and Medicare tax is a red flag. On the other hand, since you are mailing the form, you could add that notation by by hand SCH#### (#### is the amount of the taxable scholarship/stipend.

Enter the 1098-T with the stipend in box 5.  Later answer that that amount was used for room and board (so that TT doesn't apply it to tuition and fees)