Why does it keep applying tax to education expenses?

[mjfg]

I am helping my 19 year old, full time student do her taxes. She is listed as a dependent on my taxes. She received money from a Coverdell ESA, a state prepaid tuition program, and a state grant program (let's call them "tuition funds"). The tuition funds were all used appropriately, for deductible education expenses. I entered those, and it says she can't take an education deduction because she's our dependent (right, okay), but that she should enter expenses to avoid paying tax on the tuition funds she received. But then it doesn't offer a place to enter those expenses. By going through the forms view, I was able to enter in payments received by her university, reported on the 1098-T, but I'm not even sure the program is taking that into account, and it never asks for costs for books, etc.

She made $2,005 in income last year. Turbotax says she owes $2,012 in taxes. 

How do I get to the right places to enter her expenses so she isn't taxed on the tuition funds?

[Hal_Al]

Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to the section you want to change (or add to); "Other education expenses", in your case..

________________________________________________________________________________________

Provide the following info for more specific help:

• Are you the student or parent.
• Is the  student  the parent's dependent.
• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529/ESA plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q for the ESA
• Box 2 of the 1098-Q for the ESA
• How was state prepaid tuition program reported (1099-Q?) How much was it
• How was the  state grant program reported (included in box 5 of 1098-T?) How much was it
• Who’s name and SS# are on the 1099-Q, parent or student (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B charge. If the student lives at home, only the school's board charge for on campus students. 
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much taxable income does the student have, from what sources
• Are you trying to claim the tuition credit (are you eligible)?
• Is the student an undergrad or grad student?

[mjfg]

Thank you for that. It does help, but still says she owes $816 in taxes. Where is that coming from?

[mjfg]

I see on schedule 1 that it lists part of her prepaid tuition and part of her ESA as taxable income. Why?

[Hal_Al · Accepted solution]

There are three things you can do with your Qualified educational expenses (QEE):

1. Allocate then to scholarships (so that the scholarship remains tax free)
2. Use them to claim an education credit
3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, until you tell it otherwise.

One possibility is that TurboTax allocated part of your dependent's college expenses to claim the Tuition credit, even if you are not eligible or otherwise did not claim it. That reduces the amount that can be used to claim the  529 earnings, shown on the 1099-Q, as being totally tax free. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount you want to use or change it.  You may reach that screen sooner.

With multiple sources of funds, you have, it's not surprising some of it is taxable. But, for specific help, you need to provide specific numbers.  If some of it must be taxable, most people come out better making some of the scholarship taxable, rather than the ESA/529/prepaid distributions earnings