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mrshart00
New Member

Where do I enter taxable income on my son's tax form if as parents we were told as parents he has taxable income due to college scholarships and pre paid college?

 
3 Replies
KrisD15
Expert Alumni

Where do I enter taxable income on my son's tax form if as parents we were told as parents he has taxable income due to college scholarships and pre paid college?

You can use the "Education" section in  TurboTax under Deductions and Credits. 

Enter ONLY the taxable scholarship amount, don't re-enter the 1098-T into the dependent student's TurboTax program. 

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Carl
Level 15

Where do I enter taxable income on my son's tax form if as parents we were told as parents he has taxable income due to college scholarships and pre paid college?

You will still claim your son as your dependent (assuming you qualify of course).

Assuming all qualified education expenses were covered by 3rd party income received in 2020 (scholarships, grants, 529 distributions) then your son will report all of the education stuff on his own tax return, *IF* he is required to file a tax return. Then any scholarship/grant money received in 2020 that is in excess of the qualified education expenses paid in 2020 will be taxable income to your son, on your son's tax return. The amount of the excess that is taxable will be included in the amount on line 1 with the annotation "SCH" next to it.

Note also that the excess scholarship/grant amount will be taxed at the parent's higher tax rate, if the parent's tax rate is in fact, higher.

 

 

Hal_Al
Level 15

Where do I enter taxable income on my son's tax form if as parents we were told as parents he has taxable income due to college scholarships and pre paid college?

Qualified Tuition Plans  (Including Pre Paid Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), 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,  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 $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

You have $1120 of taxable income  

 

**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. Most people come out better having the scholarship taxable before the 529 earnings. 

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