This is all very confusing-Form 1098-T-who files, and does she need to file?

[Kwink]

My 18 y/o daughter is a full-time student and has a part time job.  She made $4298.60 and her Form 1098-T in box 1 has $8474.03 and box 5 has $9333.00.  She has a Pell Grant and Life Scholarship. We purchased a laptop outside of the school in the amount of $1200.00.   My understanding is that the difference in the boxes is $858.97.  Is the amount of $858.97 considered unearned income and since the laptop purchase is not reflected on this form how do we show the adjustment for the laptop? 

I file as head of Household and claim her as a dependent on my taxes.  I want to know do with both file? Does she need to file taxes with a single status with the Form 1098-T or does she even need to file the taxes at all?  Or do I file the Form 1098-T?

[Hal_Al]

 There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) 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 conditions of the grant are that it be used to pay for qualified expenses. Pell grants are not restricted to qualified expenses.  I don't know about LIFE. 

Using your numbers,  Student has $9333 in box 5 of the 1098-T and $8474 in box 1. At first glance he/she has $859 of taxable income and nobody can claim the American opportunity credit. But if she reports $4859 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1200 in expenses for those course materials, paid out of pocket. She would only need to report $3659of taxable scholarship income, instead of $4859.

Taxable Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $15,750 filing requirement (2025) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

Taxable scholarship goes on line 8r of Schedule 1, from which TT treats it as hybrid income.

[Hal_Al]

Q. Do I file the Form 1098-T?

A. Yes, in order to claim the AOC.

Q.  Does she need to file taxes with a single status with the Form 1098-T or does she even need to file the taxes at all?  

With  only $4299 + $3659 = $7958 of earned income, she is not require to file a tax return.  Although you may want her to file to document the reporting of the scholarship income. 

You can both use the 1098-T to enter the expenses. If you claim the tuition credit, you do need to report that you got one (the TurboTax interview will handle this) Your student should use the 1098-T because it makes entering scholarship income go smoother and puts the income in the right place on the tax forms, line 8r of Schedule 1.

TurboTax can theoretically handle all that when you follow the interview carefully. But, it goes smoother if you use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T that you enter in TT is not sent to the IRS.

Enter the 1098-T, exactly as received, on the student's return. Enter book and computer expenses separately.  In her interview, you should eventually reach a screen called "Amount used to calculate education credit" (or similar wording).  Be sure the amount in that box is $4000. You must complete the “education information” subsection to get that screen, That will put all her excess scholarship as income on her return (line 8r of Schedule 1).

Be advised some people are saying they're not getting the "Amount used to claim the tuition credit" (or “Education Expenses used for a Tax Credit”) screen on the dependent’s interview.  Check the student information work sheet (part VI, line 17) to verify it was entered.  If not, the alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T.

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on her return, with 0 in box 1 and the  taxable amount  in box 5. In that case the amount in the  "Amount used to claim the tuition  credit" box is 0 (if it comes up).

[LaShaunA3]

Your daughter is your dependent if she meets the IRS tests, including that you provided more than half of her support.

Since you file Head of Household and claim her as a dependent, you report the Form 1098-T on your return and determine eligibility for an education credit (such as the American Opportunity Tax Credit). Your daughter generally can't claim an education credit when she is claimed as a dependent.

Your daughter may still file her own return as a dependent (checking “someone else can claim me”) to report her wages and receive a refund of any withholding. She reports taxable scholarship income, if any, on her return. In some cases, unrestricted scholarships (such as Pell Grants) may be treated as taxable to allow the parent to claim an education credit. The tax software will walk through these options.

IRS Publication on Scholarships and Grants

Do You Have to Claim Pell Grant Money on Your Taxes?

[Kwink]

Still confused.  Why would she claim $4,000?  Since the form 1098-T has the set numbers should you be changing the numbers on the tax submission or is there another place this should be accounted for?   

[Hal_Al]

Q. Why would she claim $4,000? 

A. She doesn't claim $4000. You do. $4000 gets you the maximum AOC ($2500).

Q. Since the form 1098-T has the set numbers should you be changing the numbers on the tax submission or is there another place this should be accounted for?  

A. The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. TurboTax can theoretically handle if you enter the 1098-T, as received,  and you follow the interview carefully. But, it goes smoother if you use a work around in TurboTax (TT).  Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T that you enter in TT is not sent to the IRS.