We claim our daughter on our taxes. However, since she has scholarship that has to be reported as income from a 1098T, we have to file that 1098T on her return.

The below is in two sections. First covers college expenses, and the 2nd is specific to the 1099=Q. Please read it all so you complete the tax return correctly.

College Education Expenses

Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:

 - Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*

- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.

Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”.  The first one indicates a choice. The second one provides no choice.

If the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a half time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

Then:

The parents will claim the student as a dependent on the parent's tax return and:

The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:

The parents will claim all educational tax credits that qualify.

If the student will be filing a tax return and:

The parents qualify to claim the student as a dependent, then:

The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.

Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.)  Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.

In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.

 If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6200, then the student doesn’t even need to file a tax return, and nothing has to be reported.

If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.

Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6200, then the student should file a tax return so as to get those withheld taxes refunded.

1099-Q Funds

 First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to line 21 of the 1040 with an annotation of "SCH" next to it.

Next, 520/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is transferred to line 21 of the 1040 with an annotation of "SCH" next to it.

Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over that are taxable, then while the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.

Great  info on college expenses. Got answers to all my questions except one. 1099-Q. was issued in my name and ss#. I took the funds and paid college directly. My son has 1099-MISC income totalling 2K and Scholarships  worth 15k on 1099-T.   Scholarships and 1099-Q withdrawals put together do not exceed total Tuition reported on 1099-T.
Now, should my son file a Tax return. No taxes were withheld for him. Who should report 1099-Q? Who should claim American Opportunity Credit?

You the parent report all educational stuff on your tax return.
" My son has 1099-MISC income totalling 2K"
Am I to assume that income was received by your son for self-employment? If so, then he is required to file a tax return since the self-employment income is more than $400. If not received for self-employment, *and* his SSN is on the 1099-MISC, he still reports it. But how he reports it matters based on what box of the 1099-MISC the income is reported in, and why he received that money. Scholarship I assume, but I'd like to not assume and know for sure.

Thanks. My son has 2 1099-MISC, one for box 3 Other Income and the other for Box 7 Non employee compensation. He was teaching chess lessons part time for this income.
Since his 1099-MISC income is less than $6350 does he need to file a return?
I didn’t understand your reference to $400.

The one with income in box 7 is self-employment income. No ifs, ands, or buts about it. If it's more than $400, then he is required to file a tax return. The $6,350 requirement doesn't apply to self-employment income.
That's because with self-employment income, if it's more than $400 then he will pay self-employment tax on the amount over $400. Now he won't pay regular tax if it's under $6,350, but he will pay the self-employment tax if it's over $400. The SE tax is basically the employer contribution to his Medicare and social security account.
So answer these questions for me please, to determine how to deal with the box 3 1099-MISC income.
Is the box 7 1099-MISC more than $400?
Is the total of both 1099-MISC's more than $6,350?
Does he have any other reportable/taxable income not reported on a 1098-T box 5 or a 1098-Q? If he does, then it would not be scholarship money and would be reported to him on a W-2 if earned, and something like a 1099-INT or 1099-DIV if not earned Basically, does he have any income that you've not already made us aware of in this thread? (such as a student loan where the student is the *primary* borrower on the loan.)

OK. I understand the $400 rule Thanks.  Here is my college expense scenario:
MY SON:    1st 1099-MISC   Box 7:  $1185, all other boxes are empty - this is for Chess Teaching
                   2nd 1099-MISC Box 3: $733.80, all other boxes are empty - this is for Chess Teaching as well.  
                   He also has a 1099-T  Box 1: $20,050  Box 5:  $13,516 Box 8: checked
                    1099-Q:  Box 1: $1000 Box 2: $386 Box 3: $613 -   Paid for college Tuition
MY SELF:   1099-Q with my SS#:  Box 1: $15,106   Box 2: $3914 Box 3: $11,192 Paid for College Tuition
Please let me know how to use TurboTax to report these.

Both 1099-MISC are for self-employment when you get down to it. The 1099-MISC income (and any other "earned" income) that the student may have, is reported on the student's tax return. It will be reported on SCH C as a part of the student's tax return. All education stuff, regardless of who it was issued to, is reported on the parent's tax return. The student will not claim anything for education expenses at all, on the student's tax return. In order for the student to claim anything for education, the parent can NOT claim the student as a dependent, and therefore the parent can NOT claim anything for education. Then the student's education credits are based on the students "EARNED" income. You the parent have more earned income than the student does. So you the parent will benefit more on the education credits and deductions. So based on that, you the parent claim any and all education stuff on the parent's return.

OK. Thank you. Since parents AGI is over 180K we don't get any education credits then probably  it makes sense for the  student to report all education expenses? .  However, that one 1099-Q is in the parents name.  Well, Thanks for all the info.  Appreciate your help.

You are correct. While my writeup does mention income, it doesn't go into details. Since your AGI will be over 180K you will still claim the student as your dependent and the student will report all the education stuff on their tax return. The fact a 1099-Q is in your name should not matter, as they would still report it.
For the next tax season, I strongly urge you to change the beneficiary on the 529 account to the student.
Also note that weather you claim the student as your dependent or not, doesn't matter. The fact that you *QUALIFY* to claim the student as your dependent, means that the student has *no choice* and must select the option for "I can be claimed on someone else's return".
The student will get some credits, since they do have earned income. WHile it won't be much, any amount of credit is more than what you the parent would get, because of your AGI being over $180K.

Carl - Thanks for your help. I fee confident completing my Tax Return now.

Something I just recalled, and I don't know if it makes any difference for you since your AGI is over 180K. But it will make a difference for the student.
If you do *not* claim the student as your dependent, the dependent still has to select the option for "I can be claimed on someone else's tax return". But for the AOC (since the student has earned income) the student's program will ask them two question:
1) Do you qualify to be claimed on someone else's tax return? There answer to this question will be YES.
2) Are you being claimed on someone else's tax return? If you do not claim the student as your dependent, then when they answer this question NO, the student will be allowed to take the amount of the AOC which they will qualify for, based on the student's earned income. At a minimum, the student will get "up to" $1000 of the refundable portion of the credit.

If the education expenses were paid with scholarship funds please see the following:

You cannot include the room and board expense, as is not an option in TurboTax when you enter Form 1098-T and other qualified education expenses. If you could include it,  that would not negate the taxable portion of the excess scholarship funds. A scholarship or fellowship grant is tax free only to the extent that it doesn't exceed your qualified education expenses.  Room and board are not qualified education expenses. You can see the following IRS link for more information: https://www.irs.gov/publications/p970/ch01.html

However, if your education expenses were paid with funds from a Qualified Education/Tuition Program (payments from those programs would be reported on Form 1099-Q), then the qualified education expenses would include room and board, as long as the room and board expenses meet the following requirements:

1. Expenses for room and board must be incurred by students who are enrolled at least half-time.

   The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

   1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

   2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

   You may need to contact the eligible educational institution for qualified room and board costs. 

   Please see the following IRS link for more information: https://www.irs.gov/publications/p970/ch08.html

   
   

@TurboTaxHeather14 since room and board is in fact, a qualified education expense for 1099-Q funds, would you please update your answer for the future? I would hate to see someone pay taxes on 1099-Q funds because they read your post, and it's not all-inclusive. I'm sure you'd not like that either. Thanks. 🙂

Oh, and the FAQ is outdated to. It's no longer true that you're limited to only books, supplies and equipment purchased from the school. particularly if the school requires them, yet does not provide them for purchase.

I will definitely update my answer. Thank you very much for that information. I will also edit the information shared from the FAQ, and include the information from the IRS link instead.

I just checked and learn something from your post too. I didn't realize that 1099-Q qualified R&B expenses were limited based on the student's specific situation. Interesting! Now I've got to update what I have.

Thank you both for your feedback.  I see the error in my thinking there.  It looks like since my daughter is not eligible for any education deduction or credit because we claim her, that I should adjust the amount of her "qualified education expenses that are used to calculate deductions and credits".  It appears that tt was applying her QEE to figure her credits instead of toward her 1099Q.  The scholarship was not the problem.  Since she is not eligible for any education credits, it does not make sense to apply those QEE toward those credits.  I am I on the right path?

Sometimes I'm wary to post "everything" I have. But I find that for many it saves time by giving them the big picture all in one shot. Glad it worked out for you the way I hoped it would.

Took me a little to read and think it through, but it was much appreciated.

Hi Carl, I wonder whether you can answer me this question: It is not as simple as it looks. My child, who is my dependent, has excess scholarship in his 1098-t and turbo tax interview asks me how much of the scholarship money was paid for non educational expenses. The bursar office received the college aid funding and our own on-line payment at the same time and randomly applied the payments to various items of my child bill. The college aid is not restricted. I know how much of the scholarship the bursar applied towards room and board because the bursar sent me detailed ledger. The question is whether I can ignore that ledger, and split it in turbo tax between education and non education the way that is most beneficial to me tax wise? Specifically, suppose the bill was $10,000 tuition and $10,000 room and board, and it was paid using $15,000 college aid and $5,000 on line payment by us. Ideally the bursar would have applied $2,000 of our money towards education and the other $3,000 of our money towards room and board; and would have applied $8,000 of the aid money for education and $7,000 of the aid money for room and board. Then we would get maximum education credit and only $7,000 of the aid money would be taxable income to my child. But instead the bursar used $5,000 of our money for education; therefore $10,000 of the college aid was used for room and board and becomes taxable income to my child. Can we ignore the random way in which the fundings were applied and still claim that only $7,000 of the scholarship money was used for room and board (and the other $8,000 of the scholarship used for education)?

Unfortunately, you can't just divide things up in the most convenient way for you. Well, you could. But if audited you would most likely lose. I know people to do it and have never been audited. For them it's no problem. But then, it's my bet that the ones who do what you and then never "get back and let us know" are to embarrassed to admit we were right.
Basically, any scholarship money applied to room and board is taxable. Period.
Grant money that is applied to room and board may or may not be taxable. A grant can be specified as to what that money is for, by the grantor. Sometimes the grantor will specify that the funds can be used for qualified education expenses, as well as those unqualified expenses "directly related to the educational pursuit". Room and board would be directly related to the education. Of course, if the student is going to college in the home town and moves out of mom and dad's house just to get their own place, that's not in direct support of the education. So that could be questioned.
Whereas per the IRS rules, 529 funds can be used for qualified education expenses *and* room and board for the student in direct support of that student's education.
But generally speaking, if the amount in box 5 of the 1098-T exceeds the amount in box 1 or 2 of the 1098-T, then while the parents will claim the student as their dependent if they qualify, it is the student that will report all the education stuff on the student's tax return. The parent's will report nothing past claiming the student as a dependent. But you already know this of course.
bottom line is, the IRS has a certain order in which the IRS applies funding.
 - First, all scholarships and grants are applied to qualified education expenses. (room and board is not a qualified expense). Then if there's any excess it's taxable income to the student.
 - Next, 529 funds are applied to qualified education expense if not all covered by scholarships/grants. Then any remaining 529 funds are applied to the unqualified but allowed room and board expense. After that, any excess is taxable income to the student.
 - At this point, if all qualified expenses have not been paid in full by scholarships, grants and/or 529 funds, then, and only then are out-of-pocket expenses applied. As you know, out of pocket expenses for room & board do not qualify for a deduction of any type.
So if you're trying to shift some of the 529 funds used to pay tuition, to the room and board stuff so you can claim qualified out of pocket expenses, you'll get away with it just fine, until and if you get audited. If that happens, then all the back tax, interest, late fees, fines and penalties will make your manipulated tax savings seem like a pittance in comparison.

Thank you so much Carl for your very thoughtful response! Just to be clear, we don't have 529 or anything else. Only FINANCIAL AID provided by the college and also a MERIT scholarship provided by the college. Both are sent from the college directly to the bursar office of the same college. So: 1. You are saying that no matter what the bursar office did, I should still not claim any educational expenses, right? That I cannot decide what part was used for qualified education expenses and what part was applied toward other expenses (and so taxable). And also 2. when my child inputs the 1098-T in his own tax return, then his taxable income due to the 1098-T should be the scholarships, minus the college educational expenses, minus our out of pocket costs of text books, right? Even though the scholarships never actually paid directly for our out of pocket text books, since the bursar naturally applied the scholarship to charges on my student bill which included education and room and board? Finally, do you know if my child should report this taxable income also to the state in which the college is located, which in this case is Illinois? My child is not a resident of that state. Thank you very much!

Hi Carl, I read your answer again and would like to clarify: I am not trying to shift any 529 and we don't have 529. We do have college financial aid grant and college merit scholarship. Both not restricted. So I am trying to shift part of the scholarships fundings to the room and board so that my child will file tax on them but II can claim educational expenses. Overall we still gain then.

This information is very helpful. I would just like to clarify something. If I am entering my dependent's 1098-T on my tax return but my dependent used a portion of the grant to pay for room and board which that portion needs to be shown as taxable income, does my dependent also enter the 1098-T info on his return although I am already receiving a credit for this? To give some further details my dependent did select "someone is claiming me on their return" on his return.