Taxable 529 vs Taxable Scholarship (and how to enter)

[CSusanneC]

I have 2 children in college this year, and want to take the AOTC for both.  Their college costs are paid through student loans, scholarships (including a 'scholarship' that is taxed by my employer) and 529 distributions.  Both received 1098T (as an FYI - the college for student #1 showed amounts based on the calendar year while the college for student #2 showed amounts based on the school year - so included amounts paid in 2021 for Spring 2021); the 1099-Q shows the children as beneficiary but me (parent) as recipient due to the way the electronic payment posted.  I'm having trouble entering info for both students.

Student 1:

Unadjusted qualifed educ exp:  $47,414.73 (this is SP2020 plus FA2020 and matches 1098T excluding the book cost)

Total scholarships (can be used for any purpose): $41,469 (this is for SP2020 plus FA 2020 and matches the 1098T; excludes the scholarship taxed to me.)

Paid by student loan $3,952

Paid by scholarship taxed to me $5,000

Paid by 529 withdrawal $2883.80; (earnings on this distribution reported on the 1099Q is $1,257.26.)

Amount paid from cash for books/supplies: $264.73

Amount paid for room & board and other education costs: $12,727.80

Included in the R&B cost above is $1,900 for a travel learning course surcharge; we paid the school for it but the school did not call it 'tuition' on the 1098T.

Student made $6,000 ish in W-2 wages.

I am not including the 529 withdrawal in 12/2019 that paid tuition for SP 2020 in these calculations since that withdrawal was reported for the 2019 tax year.

So before considering the AOTC, I believe the difference between the amount we paid to the school (student loan plus taxed scholarship plus 529 withdrawal = total 11,825.80) and the total room/board/other (total $12,727.80) should be the taxable portion of the scholarship = 892.

Then there is the $4,000 needed for AOTC.  This is where it becomes muddy for me.

Using the calculation in Pub 970

$47,414.73 Unadj QEE

- {$41,469 scholarships less the $892 taxable portion of the scholarships} ie tax free educ assistance

- 4,000 needed for AOTC

=$2,837.73 AQEE which is less than the 529 withdrawal of $2883.80.

Using the rest of the calculation from pub 970, the taxable 529 amount would be $20.09 which is to be reported on Schedule 1 Form 1040 line 8 as Other Income. 

1. I can't wrap my brain around this.  It feels like we are not showing enough 'we paid' to justify the $4,000 needed for the AOTC since we made the taxable portion of the scholarship to show us paying just the r&b cost so the whole $4,000 for the AOTC is unaccounted for then we only withdrew $2883.80 from the 529.

2. Would we be better off to add $4,000 plus the $892 to her taxable income and not deal with the 529?  It just seems like adding $20 on line 8 is better than adding $4,000 as earned income. 

3.  I have no idea how to get this into turbotax to come up with the correct numbers. 

.... and this is just student #1....  :(

[Hal_Al]

It's much simpler than all that.

Ignore the 1099-Q (do not enter it, at all), since Room and Board , alone, covers the box 1 distribution amount*. 

Since the Box 1 amount ($47415)  on the 1098-T exceeds the Box 5 amount ($41469)  by more than $4000, you have enough tuition  to claim the AOTC without calling any of the scholarship taxable.

On your return, just enter the 1098-T.  Don't enter any other amounts.  They're not needed. 

Enter nothing about education, on the student's return. 

Ignore the $5000 taxed scholarship.  Because it's taxed, it's your money, not a scholarship, as far as the IRS is concerned.

*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. 

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." 

[CSusanneC]

Thanks for your quick reply.

That simplifies things - maybe I am overthinking it.  (I have lost sleep over this!)  It frustrates me because I know what I paid and how I paid it, but still can't figure out what should be reported where.

So here is what happens for student 2 - again the college costs are paid through student loans, scholarships (including a 'scholarship' that is taxed by my employer) and a cash payment, and the student received a 1098T. There is no1099-Q for 2020 because the money came out in 2021.

Info from 1098T:  Box 1: $23,071  Box 2: $26,876

Unadjusted qualifed educ exp: $23,848.85 (this is for FA2020 and matches 1098T box 1 excluding the book cost plus a payment I paid $181 in 12/20 for 2021)

Total scholarships (can be used for any purpose): $23,876 (this is for FA 2020 and excludes the scholarship taxed to me so this matches the 1098T box 2 except for the $3,000 'scholarship' taxed to me)

Paid by student loan maybe $0; we used no loan in the fall but then used it in the spring and I don't know if they moved other payments around to reflect a fall payment.  It doesn't look like they did based on the 1098T.

Paid by 'scholarship' taxed to me $3,000

Paid by sale of EE bonds:  $2,229.00  (thought these would be tax free but they were not, so I am paying tax on the interest on these)

Paid $181 in December which was the amount due for SP21.

Amount paid from cash for books/supplies: $958.85

Amount paid for room & board and other education costs: $6,215

Student made $5,000 ish in W-2 wages.

So before considering the AOTC, I believe the difference between the amount we paid to the school (payment of $2,229 plus my taxed 'scholarship' of $3,000 = total 5,229) and the total room/board (total $6,215) should be the taxable portion of the scholarship =  $986.  Or maybe I should reduce that by the $181 that I paid in December so $805?

Then there is the $4,000 needed for AOTC.

Using the calculation in Pub 970

$23,848.85 Unadj QEE

- {$23,876 scholarships less the $986? taxable portion of the scholarships = 22,890} ie tax free educ assistance

- 4,000 needed for AOTC

=-$3,041.15 AQEE which is negative, so an additional $3,041 should be added to the taxable income of the student as line 1 earned income (scholarship).

I think that student #2 has to add $4,027 as scholarship income.  The student would just type something like 'scholarship' under the info for line 1?

[Hal_Al]

You don't explain the $778 difference between Box 1 ($23071) of the 1098-T and your "Unadjusted qualifed educ exp: $23,849".  But I'll assume 23849 is right. 23849 + 959 books = 24,808 QEE

Your cashed USSB may not be eligible for tax free, if your income is too high ($97,350, $153,550 Married, including the interest add back).  But, you probably just entered it wrong. 

$24,808 - 4000 (AOTC) - 2229 (USSB) = $18579 can be  covered by tax free scholarship. $26,786 - 18,579 = $8297 needs to be reported as taxable scholarship.  Reduce that by 2229, if you don't qualify for the savings bond interest exclusion).

Enter your 1099-INT first. After TurboTax sees the amount in box 3 (savings bond interest), it will ask for education info. 

Enter the 1098-T, on your return.  Use this short cut: Enter $4000 in box 1.  Enter no other numbers.

On the student's return, enter the 1098-T with 0 in box 1 and $8297 in box 5.  The $8297 will go on line 1 of form 1040 (added to wages) with the notation SCH.  $8297 + $5000 ish should not be enough to trigger the kiddie tax. 

If you have more savings bonds; the thing to do is cash them and put the proceeds in your 529 plan. When you take the money out of a 529 plan, room & board are qualified expenses.  Room and board are not qualified expenses when you use savings bonds proceeds directly to pay the school.

[CSusanneC]

Thanks again for your reply - I appreciate the assistance with this. 

Sadly, the savings bonds were registered in my aunt and my names, so when I reviewed I understood that it was not text exempt because the student was not listed as owner.  If that is incorrect, that will change my calculations. 

For student #2, I don't understand why I have to use the school's $26,876 number when they included the amount of the $3,000 scholarship that is taxable to me in that figure.  Also, what do I do with the $181 that I paid in December?

So I have the $23,849 as my qualified educ expense before adjusting for AOTC (I paid tuition of $22,890 for fall plus $181 in December which is the $23,071 from the 1098T plus the books of $959 then I deducted the $181 since it was applied to 2021 tuition).  Should I keep the $181 in this amount - so add it back in to get the $24,030?

less the $4,000 for the AOTC.

=$19,849

Comparing to the Box 2 amount of $26,876 which includes the $3,000 that I am taxed on - so compare to $23,876?

If I compare the $19,849 and the $23,876 the difference is $4,027 which should be added to the student's income. 

This is the same amount I calculated initially.

The college does not know that the $3,000 was taxable to me so they included it in their $26,876 figure, but I don't think it should be in there as a scholarship.  If I use a reduced amount for Box 2 to deduct for the $3,000 amount on which I already am being taxed, how do I show in turbotax what I did? 

[Hal_Al]

Sorry, I missed the fact that the $181 wasn't included in box 1 and that the  $3000 was included in box 5.  Both are mistakes by the school (but not uncommon).

So, if $23, 849 is your total expenses and 23,786 (or is it 23876?) the correct scholarship:

23,849 - 4000 -23786= $3937 or

23,849 - 4000 - 23876= $4027 Taxable scholarship

Q. How do I show in TurboTax (TT) what I did? 

A. You don't show adjustments in TT, you just enter the right amounts.  Keep you calculations, if you ever need to prove anything to the IRS

I assume "the savings bonds were registered in my aunt and my names" means the aunt was the owner and you the beneficiary.   The bonds are not tax exempt because you were not the owner (even if you were joint owner with aunt, it would not qualify). Bonds in the student's name also do not qualify. The parent has to be the original owner.  The only co-owner allowed is your spouse. 

[AmyC]

Exclusion of Interest From Series EE and I U.S. Savings Bonds states: Who Can Take the Exclusion

You can take the exclusion if all four of the following apply.

1. You cashed qualified U.S. savings bonds in 2020 that were issued after 1989.

2. You paid qualified higher education expenses in 2020 for yourself, your spouse, or your dependents.

3. Your filing status is any status except married filing separately.

4. Your modified adjusted gross income (AGI) is less than: $97,350 if single, head of household, or qualifying widow(er); $153,550 if married filing jointly. See the instructions for line 9 to figure your modified AGI.

U.S. Savings Bonds That Qualify for Exclusion To qualify for the exclusion, the bonds must be series EE or I U.S. savings bonds issued after 1989 in your name, or, if you are married, they may be issued in your name and your spouse’s name. Also, you must have been age 24 or older before the bonds were issued. A bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child.