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nodog2021
Level 1

Why is TurboTax treating my scholarship as taxable income when it isn't?

I am a grad student enrolled at least half time. I received a 1098-T for 2019 with $5,000 in scholarships or grants in box 5. My box 1 amount is well in excess of. I don't qualify for any education deductions. Scholarship funds were used to pay for qualified expenses, so should be non-taxable, but TurboTax is treating the scholarship as taxable and I can't figure out why and how to fix it in TurboTax.

34 Replies
BarbaraW22
Expert Alumni

Why is TurboTax treating my scholarship as taxable income when it isn't?

Even though you used your scholarship for education expenses, there are some instances where it may be taxable.

 

Scholarships are taxable when used for any of the following:

 

  • Room and board
  • Travel 
  • Research
  • Clerical help
  • Equipment and other expenses that are not required

 

Per IRS Publication 970, a scholarship is only tax-free if it is used for qualified education expenses, not designated for other purposes and does not represent payment for teaching, research or other services.

 

Qualified education expenses include tuition, fees, books, supplies or equipment that are required for enrollment or attendance.

 

If your scholarship was used only for qualified education expenses, review your entries in TurboTax to make sure everything was entered correctly. See the steps below to access your education entries:

 

  1. Click on Federal from the menu on the left-hand side of the screen and then on "Deductions and Credits" at the top.
  2. Scroll down to "Education" and click "Show More"
  3. Click on "Start" or "Revisit" to the right of "Expenses and Scholarships" and review your entries

 

You may also want to do a final review of your return to make sure there are no errors. Click on "Review" from the menu on the left-hand side of the screen.

 

Please see this TurboTax Help Article for more information.

 

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nodog2021
Level 1

Why is TurboTax treating my scholarship as taxable income when it isn't?

All expenses were qualified expenses and they far exceed the scholarship amount. Everything is entered properly in TurboTax but it is still treating the scholarship amount as taxable.

KrisD15
Expert Alumni

Why is TurboTax treating my scholarship as taxable income when it isn't?

Yes, because there are options when it comes to education credits, the program might allocate up to $10,000 of expenses towards a credit. Once that happens, it's tricky to "re-allocate" the expenses to the scholarship. 

 

If you are working with TurboTax Desktop, go to forms and look at Form 8863. 

 

If you're using TurboTax Online, try the steps below: 

 

Please go back to the "Education" section. (Federal, Deductions & Credits, Scroll down to Education).

Get to the "Education Information" section (the last option on the "Here's Your Education Summary" screen).

Re-answer the interview questions until you get to the last screen. This screen should show how much of the education expenses are being allocated to a credit. 

If you are eligible for the American Opportunity Tax Credit (usually the more valuable credit), the credit maxes out at 4,000 expenses, so you wouldn't want to allocate more than that. 

If you are taking the Lifetime Learner's Credit, the credit maxes out with 10,000 expenses. 

If you want all the expenses to be applied to the scholarships/grants/1099-Q distribution, change the amount to 0.

Type   letme   into the search box to see which credits you are eligible for and change the credit you claim if desired. 

Once you click "Maximize My Education Tax Break" the program determines the best allocation, so don't click this if you want something different.

You can always go back to this allocation screen and change the allocation amount. 

 

 

@nodog2021

 

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ingridL999
Level 2

Why is TurboTax treating my scholarship as taxable income when it isn't?

I am having the same problem.  My scholarship is used for qualified tuition expenses but Turbotax is treating it as taxable.  I have tried everything and cannot seem to fix it.  This is very aggravating!

ingridL999
Level 2

Why is TurboTax treating my scholarship as taxable income when it isn't?

I'm having the same problem.  This sounds like a convoluted solution.  I'm not a programmer.  I just want the software to work correctly.  When is this expected to be fixed?  

DaveF1006
Expert Alumni

Why is TurboTax treating my scholarship as taxable income when it isn't?

On your 1098 T, if the amount of scholarship money on line 5 exceeds the amounts in Box 1 or 2, then the excess amount of scholarship money is treated as taxable income.  Turbo Tax does allow you to claim expenses to report to reduce the scholarship income:

 

  1. After you enter the 1098T you will come to a screen that says Here's Your Education Summary
  2. look underneath where it mentions Other Education Expenses (for all schools)
  3. Here it will ask you information about books.  enter an amount paid for Books
  4. then back in expense summary screen, select scholarships and navigate through the questions
  5. You can claim room and board expenses that will reduce your scholarship income

 

 

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ingridL999
Level 2

Why is TurboTax treating my scholarship as taxable income when it isn't?

I did all that and entered my educational expenses and it is still treating my scholarship as taxable.  It appears that there is an error in the program that needs to be fixed.  

Hal_Al
Level 15

Why is TurboTax treating my scholarship as taxable income when it isn't?

At the education summary, click delete next to your name and start the over, in the ed section.

emmad2001
Level 1

Why is TurboTax treating my scholarship as taxable income when it isn't?

Mine is doing the same thing. I cannot find the question to state that I am seeking a degree. I think that is why it is treating my scholarship as income. How can I answer this question, yes that I am seeking a degree when I cannot find the question. Has anyone else found a solution?

ingridL999
Level 2

Why is TurboTax treating my scholarship as taxable income when it isn't?

Thank you for the tip but it is still incorrect.  This appears to be a serious error in Turbotax.  Makes me skeptical of the accuracy of the other Turbotax calculations.  Just destroyed my faith in the software.  

amyorl
New Member

Why is TurboTax treating my scholarship as taxable income when it isn't?

For those running into the issue where scholarships, that were used to cover eligible education expense for 2019, are added into taxable income.  You need to:

 

  1. After you enter the 1098T you will come to a screen that says Here's Your Education Summary
  2. Select Education Information at the bottom of the list.
  3.  This will ask you if you are working towards a degree and your answers to this and your enrollment status will adjust the taxable income appropriately for the scholarship.

Note that if my 1098-T box 1 exceeded the scholarship in box 5, this may not adjust your taxable income if you scholarship exceeds your qualified tuition and related expenses.  You may need to adjust expenses to reflect actual tuition expenses that correspond to scholarships in education summary section.

emmad2001
Level 1

Why is TurboTax treating my scholarship as taxable income when it isn't?

Thank you!!! That fixed the problem.  I don't understand why such an important question is "buried" in the program.  

Lewis Cohen
New Member

Why is TurboTax treating my scholarship as taxable income when it isn't?

I am using Turbo Tax Deluxe 2019.  I have been following this thread but cannot reach any window that asks for all of the Form 1098-T information, only the scholarship amount.  Also, the line above the request for the scholarship amount lists "Tuition and enrollment fees".  This line was filled in as zero and is NOT editable.  This line is clickable and contains the following, "Note: You entered this number in earlier.",  which I did not.

 

What is the solution for this?

ingridL999
Level 2

Why is TurboTax treating my scholarship as taxable income when it isn't?

I ended up scrapping Turbo Tax Premier for my son's tax return and instead used the free online version which handled the scholarship correctly.  I messaged Turbotax directly about this error in their software and never got a response.  Very disappointing!  

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