Tax free scholarship showing as unearned income.

[SueB66]

My daughter finished her undergrad degree in May 2019.  She immediately started on her Masters at the same school in August 2019. She is working on a research project so her tuition is waived - she is still paying fees and housing.

She received a tax free scholarship to cover only tuition for all 4 years of her undergrad.  Her school calculates the 'payments received for qualified tuition expenses' on the 1098T on the year she was billed (i.e., the fees for her last semester of undergrad were included on the 2018  1098T).   The scholarship amount shows up for the calendar year it was paid - 2019.

In other words, her current 1098T shows the scholarship that paid the tuition for the final semester of her undergrad degree.  The amount of qualified tuition expenses in box 1 is covering the fees for Fall 2019 and Spring 2020 (her Masters degree).  Since the tuition is being waived, the amount doesn't appear in the totals and box 1 on the 1098T is significantly less than the scholarship amount.   

Turbo Tax is calculating the difference ( approximately $3500) as unearned income.  How can a tax free scholarship be treated as unearned income?

I spoke with the university and was told that this is how they report and that the form is correct.

How do I fix this issue so my daughter is not paying tax on her taxfree scholarship.

[BarbaraW22]

Even though your daughter used her scholarship for education expenses, there are some instances where it may be taxable.

Scholarships are taxable when used for any of the following:

• Room and board
• Travel 
• Research
• Clerical help
• Equipment and other expenses that are not required

Per IRS Publication 970, a scholarship is only tax-free if it is used for qualified education expenses, not designated for other purposes and does not represent payment for teaching, research or other services.

Qualified education expenses include tuition, fees, books, supplies or equipment that are required for enrollment or attendance.

If your scholarship was used only for qualified education expenses, review your entries in TurboTax to make sure everything was entered correctly. See the steps below to access your education entries:

1. Click on Federal from the menu on the left-hand side of the screen and then on "Deductions and Credits" at the top.
2. Scroll down to "Education" and click "Show More"
3. Click on "Start" or "Revisit" to the right of "Expenses and Scholarships" and review your entries

You may also want to do a final review of your return to make sure there are no errors. Click on "Review" from the menu on the left-hand side of the screen.

Please see this TurboTax Help Article for more information.

[SueB66]

I understand what  is considered a qualified expense.  The scholarship paid only her tuition in spring 2019 (her last semester of undergrad), and was dispersed on 1/2/19.  Since her school calculates the qualified expenses based on when the billing statement was generated (for spring 2019, it was generated in 12/18), her scholarship is showing up on the 2019  1098T while her actual tuition expenses were listed on the 2018 1098 T.

I have a statement dated 12/20/18 that shows the in-state tuition amount and a statement dated 1/2/19 that shows that exact amount being paid directly to the school by the Zell Miller scholarship.   

How do I show that the scholarship was for only the tuition that was included on the 2018  1098T and that it is not unearned income?

[BarbaraW22]

The amount reported in Box 1 of your Form 1098-T may be incorrect. There is an option in TurboTax to enter the correct amount of qualified education expenses paid in 2019 if you do not agree with the amount reported on your Form 1098-T.

To access your Form 1098-T entries please refer to the above message. Underneath the entry for Box 1, click on the button next to "This is not what "Student" paid to this school" and enter the correct amount of qualified education expenses paid 2019 in the box on the right-hand side. Please see the screenshot below.

[NCperson]

if you receive money (scholarship) that is not used for QUALIFIED college expenses, it is considered taxable income; it may not make logical sense, the that is the law.   So if Box 5 exceeds Box 1, it's taxable.....

[SueB66]

I agree - the scholarship was paid directly to the school to cover tuition for Spring 2019.  The school acknowledges that the money was used to pay just the tuition and that the way it is reported on the 1098T is misleading  - but that that is they way they do it and they won’t update her 1098T.

[pwc5555]

Hello, I'm currently having the same exact problem this year, where scholarship money is showing up a year after the payments that it was actually used for. Were you able to get this resolved?

[AmyC]

You have to report the income on your return. However, since it went towards qualified expenses, you can remove the income as well.  Follow these steps to remove the income:

1. go to the federal income section
2. scroll to the bottom
3. Miscellaneous Income, 1099-A, 1099-C, Start
4. Scroll to the bottom
5. Other reportable income, Start
6. Other taxable income?
7. Select YES
8. Description scholarship for prior year expenses
9. Amount, enter negative amount
10. continue

@pwc5555

@SueB66

[Hal_Al]

How did the scholarship "show up"?  It was on a form 1098-T, you can just ignore it*.  If it was some other form, e.g. 1099-Misc, you can use AmyC's negative entry offset. 

*The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. 

If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. 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. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2021 expenses".