When is a tuition scholarship taxable and non-taxable?

[josephtt]

When is a tuition scholarship taxable and non-taxable?

[MaryK4]

If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:

1. You're a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
2. The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.

You must include in gross income amounts used for incidental expenses, such as room and board, travel, and optional equipment.

[josephtt]

My child meets the requirements for a tax-free scholarship for her college education, why does Turbo tax increase his tax payment liability when he enters a 1098T?  The 1098T has tuition payment greater than scholarship amount.

[NCperson]

@josephtt - if you are claiming the student as your dependent (and Box 1 exceeds Box 5), the 1098-T goes on your tax return and not the student's......if Box 1 is greater than Box 5, that difference is what drives the AOC credit on YOUR tax return.

[NCperson]

Also, I like thinking about this non-taxable / taxable question differently.

1) ALL scholarship income is taxable income to the student. 

2) it can be reduced by any Qualified Educational Expenses (QEE)

3) if the result is positive, the net is reported on the student's tax return as taxable income

4) if the result is negative, the net is reported on the return of whomever is claiming the student (normally the parent's) as part of the calcuation for the AOC tax credit.  

that is a simplified explanation on how this works. 

[josephtt]

My child also received a 1099-Q from a state Qualified Tuition Program payment to her school.  He entered the 1099-Q on his tax return and it significantly raised his tax liability amount.  How should he enter his tuition payment into Turbotax so that it know the distribution was used for his tuition, and therefore should not be taxed?

[NCperson]

@josephtt - it may need to be taxed  - did the QTP payment plus the scholarships exceed the Box 1 QEE expenses? (this is why I think of any money receivefd as being taxable until it is reduced by QEE)

in simple terms, if the student received more money than the Qualified Education Expenses (normally box 1 of Form 1098T), it is taxable to the student.  

[josephtt]

No.  The total QTP+Scholarship is less than the total QEE so therefore should not increase his tax liability.  My question is then more about the process of entering the data into Turbotax. 

(a) Should he calculate the difference and enter only the difference into his Tax Return, and if so, how should that be done? OR

(b) Should he enter his 1099Q and 1098Ts into TurboTax and let the app calculate the difference in order to determine his tax liability?

[KrisD15]

When it comes to the education section, don't think of TurboTax as your tax return, think of it as what it is, a tax program. 

With that said, your TurboTax needs all the documents (1099-Q and 1098-T) to do the math. If you have distributions, you can include expenses for room and board. Those expenses can be used by the distribution.  If you don't have a distribution, room and board expenses is not needed because that cannot be use for scholarships or a credit. 

Your TurboTax program will tell you if you get a credit and/or if the student needs to claim any income relating to the scholarship and/or distribution, and if so, how much.

The downfall is that your TurboTax program does not know the tax situation of the student. Often your program will allocate expenses to your credit rather than scholarships/distribution if it thinks your credit will be worth more than the tax the student will need to pay. 

The IRS allows for this allocating for a credit. 

It's a good idea to understand how scholarships, distributions, expenses, and credits work. 

We might be able to be of more help if we knew the numbers. 

Basis and earnings on 1099-

Box 1 and Box 5 on 1098-T

Other expenses not on the 1098-T

Room and Board 

IRS Pub 970

@josephtt