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ausf
Level 1

Turbo tax reading scholarship as income and filing for students who are dependents

My son had a scholarship for 30938.  His payments for qualified tuition and related expenses are 27683. as indicated on his 1098T.  Turbo tax is telling me his income is 30000.  and he owes over 5000. in taxes.  This is not correct.  How do I fix it in Turbotax?  

 

Also, because both my kids are dependents, I listed their 1098 T and 1098 Q under my taxes.  I thought they also had to file because they received 529 contributions from their grandparents and that should count as their income.  Is that correct or do they not need to file?

7 Replies
SusanY1
Expert Alumni

Turbo tax reading scholarship as income and filing for students who are dependents

If your own accounting shows that the expenses were equal to or greater than the income from both the scholarships (used only for tuition, fees, and supplies) and the 529 plans (used for room, board, and other allowable expenses) then you can remove both the 1098-T and 1099-Q (for both students) from TurboTax. 

 

You are only required to report the 1098-T if you are using it to qualify for education credits and you only need to enter the 1099-Q when you need to report taxable distributions.  

 

TurboTax can help you to determine if you have taxable income but when there are scholarships to cover tuition and the 1099-Q is used primarily for room and board the entries can get cumbersome. 

 

Since neither is required to be listed on your return, I would remove them to simplify things and keep all of your documentation of expenses and disbursements organized for your own records in case the IRS requests them. (This isn't common, but it does happen from time to time.)

 

If the distributions from the 1099-Q funded by their grandparents was used only for their school expenses, they do not have to be reported as income on their returns, either.

 

If you review the "Instructions for Recipient" on the back or bottom of your 1099-Q (frequently in quite small type!) you will see a notation that nontaxable distributions are not required to be listed on the tax return.   

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Hal_Al
Level 15

Turbo tax reading scholarship as income and filing for students who are dependents

If your son had a scholarship for 30938. and his payments for qualified tuition and related expenses are 27683, then he has $3255 of taxable scholarship income, unless he has other qualifying expenses, such as books and other course materials. 

How do I fix it in Turbotax?  You enter the 1098-T on his return, even though it was entered on your return too.  You adjust his expenses for anything you claimed.  The most common example being you using $4000 of tuition to claim the American Opportunity Credit (AOTC). That makes his taxable Scholarship $3255 + 4000 = $7255 (less any book costs).  Enter the 1098-T, exactly as received, on the student's return. In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.  

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T on the student's return or $4000 more in the box 5 amount.

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount  in box 5.

_________________________________________________________________________

"Also, because both my kids are dependents, I listed their 1098 T and 1098 Q under my taxes.  I thought they also had to file because they received 529 contributions from their grandparents and that should count as their income.  Is that correct or do they not need to file?"

 

"Their" 1099-Q does NOT go on your tax return. 

 

Qualified Tuition Plans  (QTP 529 Plans)

It’s complicated.

For 529 plans, there is an “owner” (usually the parent, but apparently the grandparent in this case), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit or paid by tax free scholarship,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

 

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

 

**Alternatively; 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  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. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

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." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.

 

 

ausf
Level 1

Turbo tax reading scholarship as income and filing for students who are dependents

That was helpful.  The 1099Q form is straightforward enough.  For the taxable portion of the scholarship, I put the numbers as listed on the 1098T, and it continues to say the whole amount is taxable.  I did not take the American Opportunity Tax Credit on my return, because all of our payments were from a 529 (and that would be double dipping).   I am putting a zero amount in the box on my son's form, and it continues to say that he does not qualify for the AOTC.  When I look at the forms, it is listing his scholarship amount under line 1, earned income, instead of line 7 (which is where it should be, from my understanding in other posts I have read).  From your response, it sounds like I should change what I am inputting on the 1098 and just list the taxable portion of the scholarship.  Is that correct?

Hal_Al
Level 15

Turbo tax reading scholarship as income and filing for students who are dependents

 -"I did not take the American Opportunity Tax Credit on my return, because all of our payments were from a 529 (and that would be double dipping)"

--You can claim the AOTC. You avoid double dipping by paying some tax (on the student's return if he was the recipient) on the 529   

 

 

-"I am putting a zero amount in the box on my son's form, and it continues to say that he does not qualify for the AOTC."

--Student-dependents (almost) never qualify fo AOTC. 

 

-"When I look at the forms, it is listing his scholarship amount under line 1, earned income, instead of line 7"

--That is correct. It goes on line 1 (of form 1040) with the notation SCH.  It is not earned income but is treated as earnd income for purposes of the deendent's standard deduction calculation.

 

-"Should I change what I am inputting on the 1098 and just list the taxable portion of the scholarship.  Is that correct?

-- Yes, if you're not getting the correct answer following the interview. Leave box 1, at the 1098-T screen blank and put the taxable amount in box 5.  Do not enter any expenses (unless you're also entering a 1099-Q)

Hal_Al
Level 15

Turbo tax reading scholarship as income and filing for students who are dependents

If you're still having trouble, 

Provide the following info for more specific help:

  • Box 1 of the 1098-T
  • box 5 of the 1098-T
  • Box 1 of the 1099-Q
  • Box 2 of the 1098-Q
  • Who’s name and SS# are on the 1099-Q, parent or student or grandparent (who’s the “recipient”)?
  • Room & board paid. If you live off campus, what is school's R&B charge
  • Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
  • Does your student have other income, how much and what kind (W-2 wages, interest etc)

Provide the info for one student; if that goes well, we'll try the other next

ausf
Level 1

Turbo tax reading scholarship as income and filing for students who are dependents

Box 1 of the 1098-T: 27683.92
box 5 of the 1098-T: 30938.90
Box 1 of the 1099-Q: 3000.00
Box 2 of the 1098-Q: 1422.38
Who’s name and SS# are on the 1099-Q, parent or student or grandparent (who’s the “recipient”)? student
Room & board paid. If you live off campus, what is school's R&B charge- This is complicated.  Room and board charge is 7700, but a portion of this was paid for by cash and money from 529.  
Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers- his books and computer were purchased from the school and are included in box 1.
Does your student have other income, how much and what kind (W-2 wages, interest etc)- W2 wages for a total of 1905.80

 

This is the complicated one.  I was able to calculate my other son.

Hal_Al
Level 15

Turbo tax reading scholarship as income and filing for students who are dependents

Room and board are qualified expenses for a 529 plan distribution. Since $7700 (R&B allowance) is more than $3000 ( 529 Plan distribution), forget the 1099-Q.  It does not need to be entered. None of it is taxable.  

 

You want to use $4000 of the Box 1 (1098-T)  to claim the American Opportunity credit (AOC) on your return.  That leaves $23,684 (27,684 – 4000 = 23,684) to allocate to the scholarship.  $7255 (30,939 -23,684 = 7255) of the scholarship is taxable.

 

Enter  the 1098-T, on both your return and his, with modifications. On your return, enter $4000 in box 1 and leave box 5 blank. Enter no other amounts in the TurboTax (TT) interview. That should get you the maximum AOC.

 

On his return, the short cut is to  enter the 1098-T with 0 in box 1 and $7255 in box 5. Do not enter any other numbers.

 

Since his total income (1906 + 7255) is less than $12,200, technically he does not need to file a return, at all.  But, some tax experts recommend that you do so any way to document that he reported the $4000 you used for the credit, as taxable income.  He may also need to file to get a refund of any income tax withholding.

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