Scholarship, paid tuition, and qualified expenses don't add up as I understand them

[dataguy]

I am confused by how scholarship funds affect qualified education expenses.
I may have done something wrong. I am a 19-yr old college student living at home.
My college tuition was (for example) $57,000 for the 2021 year.
I received $20,000 in scholarships and aid. Thus, I actually directly paid $37,000 to the school.
My college 1098-T tuition statement lists "payments received" as $37,000 and "scholarships or grants"
as $20,000. I entered that data/form in my return. After entering the form data, I had an unexpected tax burden and looked at the
student worksheet. The "qualified educational expenses" were listed as $37,000 and
the $20,000 scholarship was listed as an adjustment. My $20,000 scholarship was being
subtracted from the $37,000 as though it was being applied to that (already reduced) value.

This reduced my qualified educational expenses to $17,000.
I "assumed" the scholarship would not be applied against (subtracted from) that paid value.
How do I get TurboTax to recognize the actual qualified expenses were $57,000 (if that is appropriate/makes sense)?
(My parent also used 529 funds to directly pay the $37,000 tuition balance and TT may now
think we have withdrawn too much. We did not.)

[Hal_Al]

It's unusual that the school would put $37,000 in box 1, instead of $57,000.  But assuming you're right, In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid (including by scholarship).

Room and board (R&B) are eligible expenses for a 529 distribution (even if the student lives at home).  That would free up some tuition for your parents to claim the tuition credit (if otherwise eligible).  R&B paid are not included in box 1 of the 1098-T.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

[RaifH]

It sounds like your school is double deducting your scholarship by reducing the tuition expense in Box 1 and then listing it again in Box 5. You can modify the Box 1 amount by selecting the This is not what I paid to this school box and enter the total tuition cost.

If your parent is claiming you, Form 1098-T would be reported on their return. The 1099-Q, if necessary would be reported on the return of whoever is listed as the recipient. In your case, you may not have to report any of it. 

Since the entire thing is a wash anyway, nothing has to be reported. However, if you or your parent, if they are claiming you, is eligible for an education tax credit, report the forms in addition to any other qualified education expenses you may have had to allow TurboTax to calculate an education tax credit. This may result in a portion of the 1099-Q being taxable but that will be outweighed by the education tax credit.

[Beth C]

We ran into this exact same problem with Turbotax yesterday! My daughter's college already reduced the educational expenses paid (Box 1 on the 1098T) by the amount of her scholarship (Box 5). Our tax liability drastically increased because of this issue.  A number of experts on line have stated that if the distributions were 100% used for qualified educational expenses, you don't have to report anything on your tax return. You can just leave it off. That's what we are going to do. Many of our friends have said the same thing. I really think Turbotax needs to ask this question in their program before having you enter the information from the 1099Q and the 1098T!

[Beth C]

Thank you for the reference to the 1099Q Instructions for Recipient!