Scholarships and fellowships

[sipos]

My daughter got more money in scholarships than they charged in tuition during the fall semester.  It is being treated as income, but was meant to cover tuition for the spring term as well.  how do you adjust for that?

[Hal_Al · Accepted solution]

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 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 2. 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.

[AmandaR1]

In the questions that follow entering the form, you'll have the option to tell the software the amounts attributable to last year and the tax will adjust. 

If you already entered the form 1098-T, it's best to delete it and then re-enter it. The instructions below will walk you through the entire process:

1. Login and click 'Take me to my return'
2. Next, select the 'Federal Taxes' tab and then click the 'Deductions & Credits' tab below it
3. Scroll down to the 'Education' section and click the blue hyperlink 'Show more'
4. Click 'Revisit' next to 'Expenses and Scholarships (Form 1098-T)'
5. The next screen will ask, "Do you want to enter your higher education expenses?" click YES
6. The next screen will say, "Your Education Expenses Summary" click the blue 'Delete' button to delete your prior entry (and confirm)
7. Now, click "Deductions & Credits' tab at the top of the screen to get out of this section 
8. Scroll down to the 'Education' section and click the blue hyperlink 'Show more'
9. Click 'Revisit' next to 'Expenses and Scholarships (Form 1098-T)'
10. The next screen will ask, "Do you want to enter your higher education expenses?" click YES
11. Now, you're ready to re-enter your form. Answer the questions and enter the form.
12. After you enter the form, the meter will go up. That's ok. Keep answering the questions, which will depend on what you have on your form. 
13. You'll come to a screen that says "Did your aid include amounts not awarded for 2016 expenses?" Click 'Yes' and you'll be able to enter the amount. If the full amount is related to these expenses, it won't be taxable.

Let me know if you have questions.