Where/how does my college student son (dependent) report his taxable scholarship money on his own tax form? Also, can he file using the simple TT form?

[snashcats]

Note that he does not have any income from other sources. The only reason he's supposed to file is because the scholarship money exceeds his tuition by a certain amount.

[Bsch4477]

Does the scholarship amount exceed expenses by more than $12,550?

[snashcats]

Hi, there:

No the scholarship exceeds tuition by about $2,000. A dependent must file when their unearned income exceeds $1,100.

[Hal_Al]

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.

[snashcats]

Thanks. I have read about this loophole. Would  you be able to answer my original questions?

[Hal_Al · Accepted solution]

Scholarship income is a "hybrid".  Although it is unearned income for purposes of the "kiddie tax" and other things; it is considered earned income for the purpose of calculating the student's standard deduction (earned income + $350).  So, unless he has more than $12,550 total income, he does not need to file.  So, he does not need to enter it. 

If needed, it is carefully entered in the education deduction section (not in the wages and income section). TurboTax balance scholarship and expenses to arrive at the taxable amount, theoretically. In actuality, it's best to use a workaround. 

[snashcats]

Thanks, @Hal_Al . Your reply led me to an article that's a few years old but seems to back up what your saying about being able to apply the standard deduction to this "unearned" income. It's a little gnarly for me to understand it, but would you say its claims are along the same lines as yours?

[Bsch4477]

The hybrid nature of scholarship income being earned for filing purposes and unearned afterwards is why I asked by how much did scholarship exceed expenses. I did a test scenario in TurboTax giving a student over $2,200 in scholarship income as their only income and the Kiddie tax form was automatically generated. 

[Hal_Al]

Q. Would you say the article's claims are along the same lines as yours?

A. Yes.

And, as @Bsch4477  points out TurboTax handles this correctly.  The kiddie tax form (8615) is generated, but does not calculate any tax  because the taxable income on line 15 of form 1040 is 0, when the student's income is less than his standard deduction.