Taxable scholarships, Form 1098-T, and educational credits

1. No. Box 5 minus box 1 is only true if all of the scholarship went to tuition when it did not in your case. You were able to take the education credit so more of this was living expenses for your daughter. You need to look at your tax return and figure out how much of the tuition you claimed, probably $4,000 and add that amount to her unqualified expenses.

2. Yes to get the taxable income correct on hers.

3. There is no need for your expenses to go on her return. Simply indicate the portion that is taxable on hers.

4. Scholarships are reported by the school and entered when you receive the form 1098-T. 

Before answering the questions about the student's tax return, let's talk about your return. 

It only takes $4000 of qualified expenses to get the maximum $2500* American Opportunity Credit (AOTC). What TurboTax (TT) should have done was use $2000 of the tuition, in addition to the +/-$2000 of qualified education expenses (computer, books) that you paid to get the maximum credit. 

This means that $2000 of tuition will not be applied to the scholarships on her return. That is, $2000 more of her scholarship will be taxable on her return.  This gets you $500* more credit and should cost her $0 to $200 depending on what other (than the scholarship) taxable income she has.  Her taxable scholarship is   $20629 - 11250 + 2000 = $11,379. If that is her only income, none of it will be taxed (it's less than $13,850).

Yes, she enters the 1098-T on her return, even though you entered it.  

Q. Is that true that books and computer that we as parents purchased and reported as qualified educational expenses should not be included in her filing?

A. No. Even though you've already claimed those expenses, they need to be entered in TT, on her return,  so that TT can do the math. In her interview, you will eventually reach a screen "amount used to claim the education credit". If TT has not prepopulated that with $4000, you should enter (or change to) $4000. 

*The AOTC is 100% of the first $2000 and 25% of the next $2000 of qualified expenses. 

Thank you both so very much! This turned out to be a lot more complicated than I anticipated - since that's the first time we are dealing with scholarships and AOTC. 

If I may ask you to clarify it one more time about AOTC - Even though, we only had $2000 of qualified educational expenses (computer, books) that we (parents) paid out of pocket, TT still takes additional $2000  from the tuition paid (to bring the total of qualified expenses to $4000) in order to calculate maximum credit of $2500. Do i understand it right? 

Also, Q.4  - One of the scholarships she received for academic year 2023-2024 is not reported on 1098-T form - I am assuming because it technically has not been received in 2023, but in early January 2024. So it will eventually be reported by the school on the 2024 1098-T form, is that right? 

I am asking this, because my total of all the scholarships she received for the academic year 2023-2024 is higher (by the amount of that one scholarship) than the reported by the school. By the way, I don't have a record of when it was sent to the school since it is sent directly by the state (Hope scholarship). 

I guess I am also trying to understand, if she is allowed to report this scholarship on 2023 tax year, even if it's not added on 1098-T? 

Thank you so much for your help!

Q. If I may ask you to clarify it one more time about AOTC - Even though, we only had $2000 of qualified educational expenses (computer, books) that we (parents) paid out of pocket, TT still takes additional $2000  from the tuition paid (to bring the total of qualified expenses to $4000) in order to calculate maximum credit of $2500. Do i understand it right? 

A. Yes.

Q. One of the scholarships she received for academic year 2023-2024 is not reported on 1098-T form - I am assuming because it technically has not been received in 2023, but in early January 2024. So it will eventually be reported by the school on the 2024 1098-T form, is that right? 

A.  Yes, most likely.

Mismatched years on scholarships is a common problems with school 1098-Ts,  Basically, you need to know what's going on and adjust the 1098-T, as/if needed, either this year or next year, or both.  If you're saying that some of the tuition in the 2023 box 1 was actually paid by scholarship the school posted in 2024 (and is not shown in the 2023 box 5), then you may need to reduce the amount in box 1 that you enter, in TT*. But, that doesn't sound right with Box 1 already $11,250 and box 5 with $20,629. 

*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 (or both in your case). 

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 2023 expenses".

Or if you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

I

Thank you again for your detailed response. 

I am going through form 1098-T in TT and here is what is confusing. So I reported the portion of the total scholarships that is taxable in income (education area). Now filling up the 1098-T in deductions and credits just using the numbers of the actual form from her school. TT is asking if any of the $20629 in Box 5 includes amounts already reported as income on your tax return.

I feel that the answer should be Yes, since I reported the taxable portion as income. But confused by TT's options:

Yes, I had scholarships or other aid reported on a Form W-2 or Form 1099-MISC. 

No, I didn't have any scholarships reported on a Form W-2 or Form 1099-MISC

We don't have any of those forms. The only form we have is 1098-T, but we know that the scholarships covered both qualified (tuition and books) and non-qualified (room and board) expenses.  And the non-qualified ed. exp is what we reported as income.  

What do we answer for TT's question? 

Thank you.

You would answer no to the question if you had any scholarships reported on a Form W-2 or Form 1099-MISC. 

@catkik 

@catkik  said

"So I reported the portion of the total scholarships that is taxable in income (education area)."

I don't know how you did that, separately from entering the expenses??? You enter the 1098-T and the rest of the info and let TT  determine the taxable amount.

But, to answer your question, you answer no to that question. It applies to income reported on a W-2 or 1099. 

The simple work around is manually calculate the taxable amount of scholarship (I think you've done that). Enter the 1098-T, on the student's return, with box 1 blank and the taxable amount in box 5. Enter no other numbers. 

I think I see where I confused you. So I calculated the part of the total scholarships received minus the qualified expenses (tuition and fees) plus the AOTC credit that we (parents) claimed on our return and reported this amount in the Income section Less Common Income/Taxable Scholarships and Fellowships. 

When I got to the Deductions and Credits, I entered the numbers from the 1098-T form. 

Q1. Do the computer and books ($2000) that parents paid for need to be included in Other Education Expenses here on the student's return? or they already played their role in the parents' tax return. 

Q2. TT question - Did your aid include amounts not awarded for 2023 expenses?

  Was any of the scholarship income not designated to pay 2023 education expenses?

And when I say, YES, it asks for how much of the total scholarhips (form 1098-T) was not designated for 2023 expenses? 

Based on the school financial statements, I see how all the scholarships were received in 2023, but only about half was paid for 2023 tuition plus room and board expenses.

so Is that what I am showing here? The amount of the scholarship money that was paid in January 2024 for the spring 2024 semester. 

Thank you for all your patience and help! 

I feel like I am going a long way around but that's because I am trying to be honest and don't really know what I am doing. 

@catkik  said

"reported this amount (taxable scholarship) in the Income section Less Common Income" 

 That usually reports it as unearned income on line 8z of Schedule 1.  That will give the student a smaller standard deduction. You want it on line 8r of schedule 1 (taxable scholarship). Verify where TurboTax put it and the amount and reply back

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes (e.g. EIC). 

I just looked at the preview and it shows the taxable scholarships on line  8r of the Schedule 1. Is that correct?

thank you. 

Q. I just looked at the preview and it shows the taxable scholarships on line  8r of the Schedule 1. Is that correct?

A. Yes. 

Since you have already reported the scholarship, that way, you do not need to enter the 1098-T, or any other expenses, in the educational expenses and scholarships section.  We were only going to do that to report the taxable scholarship and now that is already done. 

@catkik 

Are you using TurboTax online or download software? 

In the past, the ability to enter scholarships, as income, in the income section (rather than the educational expenses and scholarships section) was only available in the download versions of TT. I want to verify that you didn't do that in the online version. 

I am using a CD (so I guess more like a download version), not online. 

Since you have already entered the taxable scholarship, in the income section (which is possible with the CD versions), you do not need to enter anything, on her return, in the educational expenses and scholarships section. Delete her 1098-T. 

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click delete next to the student's name. 

Just to double check, how much did you enter as taxable scholarship and how did you arrive at that number?

So for the taxable scholarships, I took the total scholarships (basically off her 1098-T) minus qualified education expenses (also off 1098-T - tuition, fees) + about 2000 (the difference between AOTC of 4000 that we claimed on our taxes and our qualified educ expenses of 2000 - computer and books, that we paid). 

Here is my formula 

Total Scholarships for 2023 - total qualified education exp+ AOTC (max) - outofpocket qual.ed.exp.

$22129-11250+ 4000-1913=12966

So you are saying since she is reporting this taxable scholarships as income, we should not be doing any deductions and credits? if you could explain, why, I'd appreciate it. 

Of course, it makes her return a lot easier. I just need to understand why. 

Right now, I've gone through the whole deductions interview and even entered the scholarships that are designated for 2024 expenses (which is about half). 

Are you saying that all of this is not necessary? 

Thank you so much!

If you want to claim the education credit, we start with education costs then the left over is scholarship income to the student. So $4k to you leaves $7250 plus all your other qualified expenses equals the remaining qualified education expenses available to be paid by scholarship. Subtract that from the scholarship for the taxable income.

1. If you qualify for the AOTC, $4k will maximize it for you. What education tax credits are available? 

2. You do want to claim credits, they are much more valuable than a few dollars of taxable income to the student.

Don't forget, scholarship income brings the kiddie tax into consideration. See What is the Kiddie Tax?

Q. So you are saying since she is reporting this taxable scholarships as income, we should not be entering any deductions and credits (expenses) on her return?

A. Yes.

Q.  Could you explain, why?

A.  Because you effectively already  enter all her expenses when you manually calculated the amount of taxable income ($22129-11250+ 4000-1913=12966) and entered it in the income section.  You don't claim the education credit, on her return, because you claimed it on yours.  You should enter nothing in the education expenses and scholarships section, on her return.

Entering the taxable scholarship in the income section was an alternate method you managed to find. TurboTax coulda woulda shoulda done that in the education expenses section. 

Thank you very much! I will proceed!