Rules about submitting 1098-T and being a dependent

[manii]

Hi all, this is my first time filing taxes so I am rather confused. In terms of actual income, I made $800 from a part time job last semester (didn't have any withheld so maybe I have to pay some taxes on that).

However, when my university gave me my 1098-T, my box 5 for scholarships was much higher than my box 1 for tuition paid. It recently came to my attention that this extra amount is considered taxable income (no one had bothered to tell me that before - 2019 was my first full year as a student so luckily it didn't affect anything for 2018). This is accurate, since my scholarship also covers my room and board and other expenses beyond just tuition.

The issue is that on TurboTax, I can enter all my 1098-T info and it shows that I owe a few hundred in taxes. I am fine paying that if I must. Also, I have two options: I can say that I am *eligible* to be claimed as a dependent but will not be claimed, and this gives me a lower amount owed than if I say I *will be* claimed - so should I then tell my parents they shouldn't claim me as a dependent? 

The rules are just really confusing to me, and my parents don't know what to do either. Help would be appreciated!

[JotikaT2]

It depends.

If you are being claimed as a dependent on your parent's return, they will be the ones who report the 1098-T information.  

This may be more practical as you may not even have a filing requirement.  Please see the attached to determine if you need to file a return.

Gross income amount for dependents

You are correct that scholarships can be taxable if they are used for the following items:

• Room & board
• Travel & incidental expenses
• Any fees, books & supplies not required for classes

 Scholarships are not taxable if used at an eligible school for a degree if:

• Tuition & fees
• Fees, books, supplies needed for classes
• Scholarship or fellowship for services from:
• National Health Services Corps Scholarship Program
• Armed Forces Health Professions Scholarship & Financial Assistance program

If after reviewing your total income above, you determine you do not have to file a return, you should have your parents claim you as a dependent and tax the education credits on their return.

They should input the 1098-T information as follows:

1. Go to the Federal section of the program.
2. Select "Deductions & Credits"
3. Select "Expenses and Scholarships (Form 1098-T)" and click start

Here is a handy chart that compares the education credits and each of the requirements.   

Chart comparing credits

Tuition & fees deduction

[manii]

Thanks for the prompt response. I will need to file my own taxes as the difference in box 5 and box 1 on 1098-T is over $12,200. I don't think I qualify for any of those deductions as my scholarship covers all tuition and fees costs.

I should have included this in the original question, but I have also heard that I need to file Form 8615 (tax for child with unearned income) - this confuses me since I thought the taxable scholarship was considered earned income. Does turbotax automatically figure this form for me? Because right now I think I have all of the numbers correct, though nowhere did I explictly fill out the 8615. I just told turbotax that my parents were alive and I earned a certain amount.

[KrisD15]

If you need to file form  8615, TurboTax will generate it for you, but scholarships are not unearned income. 

[manii]

According to the rules on Form 8615, scholarships are definitely unearned income: https://www.thetaxadviser.com/issues/2019/jul/kiddie-tax-unearned-income-scholarships.html

But thanks for your help. I see now that turbo tax took care of it.

[KrisD15]

It is a grey area. 

For example, if the scholarship income is 2,000 it is not considered as unearned and the dependent does not meet the filing requirement based only on that income. 

The income can adjust the Earned Income Credit, if the student is eligible for the credit. 

The income is not subject to Self-Employment tax.  

This is one of the many areas where there are exceptions to the rules. 

[FLmom]

I am the parent, but have similar circumstances to the original poster.  Hoping to get some feedback! 

I'm a single mother filing as HOH.  I have 19 year old son that I claim as a qualified dependent who was a first year college student in 2020.

My son received a 1098-T with Box 5 is larger than Box 1 by ~ $3,000 (applied to room/board and other non-qualified expenses).  My understanding is that my son needs to file a return and report the $3,000 as unearned income (because it exceeds the $1,100 unearned income threshold).  My son has no income or reportable items of any kind other than the 1098-T unearned income from scholarships/grants.

We've used Turbotax to prepare (not filed yet) a separate return for myself and my son, but I could really use some advice/validation as to whether this is the correct way to file.

I entered the 1098-T my son received on my return.  I also submitted an additional $1,740 in qualified expenses spent on a laptop (required for online school this year) and books.  Although Turbotax warns me that my son will need to report the unearned income (difference between Box 5 and Box 1), it is giving me a refund for the full $1,740 in expenses under the American Opportunity Credit.  

My son also submits the 1098-T on his return.  He does NOT submit the $1,740 in additional expenses to offset the difference between Box 5 and Box 1.  He states that he can, and will, be claimed as a dependent, therefore disqualifying him from educational credits.  By submitting the 1098-T on his return, Turbotax captures his unearned income and prompts him to complete Form 8615 and provide my name, ss#, etc...   In the end, Turbotax says that he has no tax due.

Questions:

1. Is including the 1098-T on both returns a valid approach?

2. Am I really allowed to get refunded for the $1,740 out-of-pocket qualified expenses under the American Opportunity Credit even if my son has unearned income to report from the scholarships/grants received?

3. If Turbotax states that my son has no tax due after reporting the 1098-T and 8615, does he still need to file? - I assume yes because his unearned income exceeds the $1,100 threshold but I am not sure.

This approach has allowed me to maximize my return by getting refunded for the $1,740 in expenses, while my son is simultaneously avoiding tax due on the unearned income from the 1098-T.  Is this legitimate and should I be concerned that the IRS might flag either my, or my sons return?

[KrisD15]

NORMALLY FOR DEPENDENT STUDENTS- Parents (or whoever claim you) gets the credit if there is one and the student claims the taxable income if there is any. 

It is confusing and one of the reasons it is, is that this is one of the few areas where you have options of how you want to report the tax information. The IRS allows you to (legally) manipulate the education expenses and scholarships to get the best tax break. 

Yes, you, as the student, need to claim as taxable income the excess amount of scholarship funds received in the tax year that is over the education expenses that were paid in the same year. 

Yes, if claiming you on their taxes has no benefit, you can select "No" to the second question. You are still filing as a dependent, but you may get the non-refundable portion of the credit on your return. This is tricky and you should understand what you're doing. 

ALSO BE AWARE that you might be able to claim MORE income if that allows a better credit for your parents.

When you enter your W2 and the 1098-T, TurboTax will do the math and tell you what you owe. You might want to use the 1098-T on your parents return, then on yours to see which way is better, but you can only file it one way. 

I suggest you look at Pub 970 page 16 to see the examples used by the IRS as to the options you have. 

@manii

[macuser_22]

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@FLmom wrote:

Questions:

1. Is including the 1098-T on both returns a valid approach?

2. Am I really allowed to get refunded for the $1,740 out-of-pocket qualified expenses under the American Opportunity Credit even if my son has unearned income to report from the scholarships/grants received?

3. If Turbotax states that my son has no tax due after reporting the 1098-T and 8615, does he still need to file? - I assume yes because his unearned income exceeds the $1,100 threshold but I am not sure.

Only the taxpayer claiming the dependent can claim the educational credits, However, if the 1098-T box 5 is more then the box 1 tuition then that becomes taxable income to the received of the scholarship, the student so the 1098-T should also go on the students own tax return.    That income should show on  the students 1040 form line 1 with "SCH" next to it.

Since that is unearned income and if all the child's unearned income exceeds $2,200 then that will trigger the 8615 "Kiddie tax" form.

[FLmom]

Thanks for the response macuser!

One follow-up question for you specific to using Turbotax; On my son's tax return there was not an obvious place to enter the unearned income when completing the 'Income' section.  However, once we submitted the 1098-T, Form 8615 was triggered and we completed it.  Since I can't see the return in Turbotax until its done, is it safe to assume the process we followed will result in the unearned income being reported on my son's 1040 form line 1 with "SCH" next to it?

[macuser_22]

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@FLmom wrote:

Thanks for the response macuser!

One follow-up question for you specific to using Turbotax; On my son's tax return there was not an obvious place to enter the unearned income when completing the 'Income' section.  However, once we submitted the 1098-T, Form 8615 was triggered and we completed it.  Since I can't see the return in Turbotax until its done, is it safe to assume the process we followed will result in the unearned income being reported on my son's 1040 form line 1 with "SCH" next to it?

---

Yes there is.  You can preview the 1040 anytime.

https://ttlc.intuit.com/community/accessing/help/how-do-i-preview-my-turbotax-online-return-before-f...

[Hal_Al]

@FLmom 

You son does NOT need to file a tax return if the $3000 of scholarship income is his only income.  Although taxable  scholarship is unearned income, for purposes of  calculating a dependent's standard deduction, it is treated as earned income.  Another way of saying that is, scholarship income is not subject to the $1100 filing threshold, it falls under the  $12,400 filing threshold. 

Q. 1. Is including the 1098-T on both returns a valid approach?

A 1.. Yes

Q. 2. Am I really allowed to get refunded for the $1,740 out-of-pocket qualified expenses under the American Opportunity Credit even if my son has unearned income to report from the scholarships/grants received?

A. 2. Yes and it gets better. You are allowed  to claim even more and get the maximum $2500 American Opportunity Credit.  See details below*. 

Q. 3. If Turbotax states that my son has no tax due after reporting the 1098-T and 8615, does he still need to file? -

A. 3. No. As stated before, it's the $12,400 threshold that applies, not $1100.

Q. 4.  This approach has allowed me to maximize my return by getting refunded for the $1,740 in expenses, while my son is simultaneously avoiding tax due on the unearned income from the 1098-T.  Is this legitimate and should I be concerned that the IRS might flag either my, or my sons return?

A. 4.  Yes, very legitimate and even quoted in IRS publications. 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 $7000 in box 1. At first glance he/she has $3000 of taxable income and nobody can claim the American opportunity credit. But if she reports $7000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Adding  your $1740 of out of pocket expenses to the example; the student only reports $5260 as income.

This is not some sinister scheme. 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”.

[aphillips2]

I find myself in a similar situation as @FLmom.  Specifically, my daughter received a fellowship for grad school.  The value of the fellowship plus our 529 withdrawals exceeds the cost of all (qualified and non-qualified) expenses.  I expected that she would be paying taxes on the excess portion of the fellowship (if it was high enough to require her to file).  Instead, the excess is showing up on my return as other income (Schedule 1, Part 1, line z).  How do I choose to move this "off of my return" in TurboTax?  Do I just manually adjust that line in the form to show zero?

[Hal_Al]

@aphillips2 

How did her fellowship even get entered in your program? How was it reported to her initially; box 5 of the 1098-T, W-2, 1099-Misc, something else.  

As you surmise, her taxable fellowship goes on her return, line 8r of Schedule 1, not line 8z.  That distinction is important. 

[aphillips2]

Yes, her fellowship was listed in box 5 of the 1098-T from her university.  I had to enter that on my return to offset the 529 withdrawals that I took to pay for her tuition.  The excess of her fellowship (taxable amount) now shows up on line 8z of my return.