Turbotax is taxing 1098-T box 5 scholarship

[rpellegr]

Hi - I am filing my son's taxes and found that Turbotax is taxing the scholarship amount in 1098-T box 5.

Here are some sample numbers

- Box 1 = $20k

- Box 5 = $5k

- 529 plan paid $20k to the school

The Student Information Worksheet section VIII line 4 shows the $5k as excess distributions and calculates line 8 earnings taxable to recipient which ends up on 1040 line 7a.

According to https://www.irs.gov/pub/irs-pdf/p970.pdf Scholarship is tax free.

Should I zero box 5 on the 1098-T to work around this problem?

thx! 

[macuser_22]

Scholarships in excess of tuition are taxable income to the student that had the scholarship.   That should be on line 1 of the students tax return with SCH next to it.   Scholarship are the students income and not the parents.

If the 20K 529 paid the institution then the scholarship would be a taxable excess.

[rpellegr]

thanks for the quick response...  sorry, i need to correct my example numbers as follows:

- Box 1 = $20k

- Box 5 = $5k

- 529 plan paid $15k to the school

I see the scholarship as a discount to the tuition and not a taxable amount.  Is that correct?  is Turbotax calculating incorrectly?

[macuser_22]

Whose  tax return are you asking about?   Scholarships are not reported on the parents tax return.  They are reported on the students ta return of the student is required to file a tax return.

[Hal_Al]

Room and board (R&B) and books and computers are not included in box 1 of the 1098-T.  Books and computers and R&B, even if the student lives at home,  are qualified expenses for a 529 plan distribution.  From the numbers you  provided, your 1099-Q is fully covered by expenses.  Just don't enter (or delete) the 1099-Q, in TurboTax (TT)*.  The TT interview is complicated.

Furthermore, if you have at least $4000 in books and computers and R&B expenses**, you are eligible for the American Opportunity credit (assuming your income is not too high). You should enter the 1098-T on your return. 

Your report nothing on the student's return; not the 1098-T, not the 1099-Q.

*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. 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.

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." 

**  Books and computers and R&B expenses are effectively covered by the 529 plan (and/or scholarship) freeing up $4000 of tuition to be claimed for the tuition credit, on your return.

[rpellegr]

thank you

I am talking only about my son's return.  He's required to file based on his earned/unearned income.  On his return, I have indicated 'can be claimed by someone else'.

Yes, the 1099-Q is fully covered.  529 payments went directly to the college to cover the full expenses (net of the scholarship), including on-campus R&B.

For the AOC credit on my son's return, there are some additional expenses (i.e. $1500 for a computer) that I was not planning to include.  Instead, I was expecting to mark a portion ($4000) of the 529 profits taxable to get the higher value of the credit.

So the 529 distributions should be tax-free except for the $4000 which is treated as taxable.  The problem is that the 1098-T box 5 number ($5k) is being calculated (incorrectly) as taxable.

thx!

[Hal_Al]

Your son is not allowed to claim the AOC , on his return, because he is (or can be) a dependent*.  If you're not eligible, because of your income, then nobody gets the AOC.

" I was expecting to mark a portion ($4000) of the 529 profits taxable to get the higher value of the credit".

That is not necessary, you have enough expenses to claim both the AOC and claim the 529 earnings as tax free (and none of the scholarship is taxable either). You can count the $1500 computer against the 529, freeing up tuition for the AOC .

"The problem is that the 1098-T box 5 number ($5k) is being calculated (incorrectly) as taxable".  That's because you're not correctly entering the offsetting expenses. 

*If the student actually has a tax liability, there is a provision to allow him to claim the non-refundable portion of the AOC.  But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return.  A full time, unmarried student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit if more than half his support comes from his earned income.

[rpellegr]

Thanks for the continued responses.  I am looking for a suggestion on a straight forward approach.

- I am not eligible for the AOC

- Son's taxes say he 'can be claimed'

- I am not claiming him on my return at all

- 529 distributions went to the college tuition bills (Box 1 = $20k, Box 5 = $5k, 529 plan paid $15k to the school)

- there was a laptop purchase but was not planning on referencing that

- Turbotax is still including the AOC credit

- Son does have tax liability...  had earned income 

thx

[Hal_Al]

The straight forward approach is: do not enter the 1099-Q, at all.  None of it is taxable.  You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board  to cover the distribution. You have done  the math to determine that there is enough expenses left over for you to claim the tuition credit.  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.

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." 

- ''Son does have tax liability...  had earned income and  Turbotax (TT) is still including the AOC credit".

TT should show the non-refundable portion (up to $1500)  of the AOC on line 3 of Schedule 3.  It should not be showing any refundable AOC (line 18c of form 1040).

If an amount is shown on line 18c, you should go through the personal info section again. In particular, the question did you (your son) provide more than half your own support with earned income. Answer no. 

- "529 distributions went to the college tuition bills"

No, the 529 distribution did not go to any thing, specifically. It was only distributed. You may count it as going to any college expenses.  So, you count it as going to room and board and computers, because tax free scholarship cannot be used for those items, and 529 money can.  R&B cannot be used for the tuition credit, but the tuition, your free up, can.