Where do I report income from school grants that exceed tuition and expenses?

[CBKfromNJ]

My child is a dependent student and received grants.  The grants exceeded the tuition amount and I applied the balance toward room and board.  TT says that I cannot take a deduction for the education expense because the grant exceeded the expenses.  I understand that.  But, I do not see where the excess is counted as income in TT.  Does TT automatically put the excess in some income "bucket"?  If so, where do I see that?  If not, where do I enter the excess from the grant?  

[Vanessa A]

If box 5 on your 1098-T is greater than box 1, then your child would report this income on their return.  You would not report it on yours.  They will go through and enter it the same as you just did, in the education section, but then it will be listed as other income on their return. 

[Hal_Al · Accepted solution]

If your student has taxable scholarship, you do not report it on your tax return, even if he is your dependent.

He enters it on his own tax return.  If taxable scholarship is his only income, and the amount is less than $12,950, he does need to file a tax return.  Scholarships that paid for non qualified expenses are taxable. Tuition, fees, books and computers are qualified expenses.  If box 5 of his 1098-T is more than box 1, TurboTax will automatically treat the difference as taxable scholarship income unless he tells it differently.

You do not report his/her income on your return. If it has to be reported, at all, it goes on his own return. If your dependent child is under age 19 (or under 24 if a full time student), he or she must file a tax return for 2022 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,950 (2022).
2.          Unearned income (interest, dividends, capital gains, unemployment, taxable portion of 529 distribution) of more than $1150 (2022)
3.          Unearned income over $400 (2022) and gross income of more than $1150 (2022)
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2300 ($12,950 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.

[Hal_Al]

@CBKfromNJ  said "  TT says that I cannot take a deduction for the education expense because the grant exceeded the expenses.  I understand that."

That's not necessarily so. 

There is a tax “loop hole” available. 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 school’s billing statement specifically shows the scholarships being applied to tuition or 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.