What is the deal with: did (my kid) pay for room and board with a scholarship or grant?

[mister-broshar]

WRT "Tell us if (my kid) used a scholarship, grant or fellowship to pay for room and board or for one of these other expenses: research, travel, clerical help or equipment." Who knows? Money in / money out. Scholarship is money in. R&B is money out. How can one be directly related to the other. If you give me 10 bucks and someone gives me 20 bucks and I buy something for 15, did I use 10 from one and 5 from the other? or 15 from the 2nd. Money doesn't work that way. The question seems like nonsense. And that is not the worst thing about this page. I'm quite sure I have also discovered a bug. If I answer yes, enter 4999 and continue, I get a page with msg "turns out 's education assistance counts as income" Then, I select back, enter 1000 and continue, I get a page with msg "turns out 's education assistance counts as income ... will need to file a tax return to include this $4999" Doing again: back, enter 2000 and continue, I get a page with msg "turns out 's education assistance counts as income ... will need to file a tax return to include this $1000" It's reporting the value from the _previous_ entry; not the current entry. Since the taxable amount changes as I enter different amounts, I wonder what value it's using to calculate my taxes: the value I just entered or the previous value. I get very nervous when I think the software is making a mistake.

[DaveF1006]

It depends. The reason why it is asking you this question is to give you an opportunity to maximize your education credit benefit.   By reporting the room and board amount, you are allocating the scholarship amount between non-qualified educational expenses (room and board) and qualified educational expenses. By allocating your scholarship income to nonqualified education expenses you may increase the educational credit that will outweigh the taxable amount of your scholarship.

[Edited 02/07/24|8:22 am PST]

@mister-broshar 

[Hal_Al]

You receive a 1099-T with qualified expenses in box 1 and scholarship in box 5.  The scholarship in box 5 is assumed to be used  to cover the tuition in box 5, unless you tell TT otherwise.  The way you do that is to tell TT you used the money for room & board (an unqualified expense). It's not really a matter of tracking every dollar and how it was spent. What you are doing is allocating sources of money (scholarship, 529 plan, employer assistance, out of pocket/loans) to the expense types to achieve the best tax result.

So, this is how you tell TT that some of the scholarship is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B. 

[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.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 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 $1000 in expenses for those course materials, paid out of pocket. She would only need to report $5000 of taxable scholarship income, instead of $6000.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.