Why does TT say my son's scholarship is taxable income bc it paid for part of room and board. He is enrolled in a 4 year degree program at a public university.

[DawnC]

Room and Board is not a qualifying education expense.  Generally, room and board isn't a qualified education expense for education tax credits.

Room and board expenses can be used for tax-free distributions from a Coverdell ESA or 529 plan.  To qualify, the student must be enrolled at least half-time in a degree or certificate program.  Room and board expenses can be included in the qualified education expenses for the non-taxable portion of the plan's distribution.   Is room and board deductible?

[teresa_k_cooper]

Additional note is that the university requires all freshmen to live on campus and have a meal plan.

[KrisD15]

As answered earlier, there are two different types of education expenses. 

Group A. Tuition, fees, book and supplies

Group B. Tuition, fees, book, supplies and Room and Board

And then there are scholarships and distributions from education savings accounts. 

Tax on Scholarships can be offset only by Group A

Tax on Distributions can be offset by Group A or Group B 

If your son received more in Scholarships that what was spent for Group A, the excess is taxable income for the student. 

[Hal_Al]

Scholarships that pay for qualified educational expenses (QEE - tuition, fees, books and other course materials) is tax free.  Scholarship amounts that exceed QEE is taxable income, on the student’s tax return. Room & board are not QEE, not even when required to live on campus. 

If box 5 of the 1098-T exceeds box 1, TurboTax (TT) will treat the difference as taxable income, unless you enter additional QEE at books and other expenses.

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

Taxable scholarship goes on line 8r of Schedule 1, from which TT treats it as hybrid income.

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  There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. 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 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.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.