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.

 

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.

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

 

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!

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?  

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

 

 

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.  

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

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?

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.  

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.

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

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?

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!  

I'm having the same problem as ingridL999. 

 

I have a 1098-T : box 1 = $51,920; box 5 = $10,000.

 

TurboTax desktop is treating the scholarship as taxable. In actuality, the $10,000 scholarship was deducted from the tuition bill, which I paid, and is represented in box 1 of the 1098-T form.

 

I can't find a way to fix this.

 

@Intuit, what do I do? It looks like a bug in your software to me.

Are you a dependent on someone else's return? 

@KrisD15 

 

No. I'm the Dad paying for my (dependent) son's college bill using a 529 Plan.

 

 

@johnsonweb  

In addition to box 1 ($51920) and box 5 (10000) of the 1098-T, please provide the additional info

• amount in box 1 of the 1099-Q
• amount in box 2 of the 1099-Q
• other expenses like books, computers and software
• room and board
• who's name ad SS# are on the 1099-Q
• Is your income too high to qualify for the Americana opportunity credit ($90k, 180K married)

The $10,000 scholarship would not be taxable on your return. Some of the 1099-Q (box 2) might be.  Youre most likely going to have to delete the ed info (see above) and start over.

 

For a full discussion, see below

________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans)

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

 

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

 

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

 ***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.

@Hal_AI

 

Thanks for your thoughtful reply. I believe there is a bug in the way Turbo Tax calculates total qualified education expenses on the 1099-Q which I will expand upon shortly.

 

To answer your questions:

> 1098-T box 1 ($51920) and box 5 ($10000)
> 1099-Q box 1 ($52,628)
> 1099-Q box 2 ($31,923)
> Other expenses: room and board ($2,000)
> Dad is recipient so Dad's name and SSN are on 1099-Q. Dad pays the college bills through his checking account and is reimbursed by the 529.
> Is your income too high to qualify for the Americana opportunity credit ($90k, 180K married): yes my income is too high but this is not applicable as I am not using the Americana opportunity credit.

 

My 1098-T box 1 is $51,290 and my student had additional room and board expenses of $2,000 (not included in the 1098-T) so my qualified tuition and related expenses should be $51,290 + $2,000, or $53,290.

 

If I look at TurboTax's Form 1099-Q on page 3 of the "Qualified Tuition Program Computation of Taxable Distribution Table" I see that line 2c "Adjusted Qualified Higher education Expenses applied" is $43,920. This is exactly $10,000 short of what it should be and exactly matches the student's $10,000 scholarship. In other words, TurboTax is reducing my qualified higher education expenses by the scholarship amount which means TurboTax is reporting that I owe income taxes on that scholarship. That can't be correct.

 

In addition, I have another student in college who does not have a scholarship. She has a 529 like her brother. TurboTax correctly calculates her total qualified education expenses... because she does NOT have a scholarship.

 

Add these data points to the reports from other users (posted above) and I can only conclude that TurboTax has a bug related to the calculation of total qualified education expenses on the 1099-Q form.

 

@Intuit: can you please post a message that you are investigating this?

 

Thanks.

For a full discussion, see below

TurboTax appears to be doing it correctly. It is not taxing the $10,000 scholarship.  Instead, it is reducing the qualified expenses because $10,000 of those expenses were paid by tax free scholarship. 

 

So,  43,920 / 52,628 = 83.45% of the box 2 (1099-Q)  is tax free.  0.8345 x 31923 = 26,641.  You have  31,923 - 26,641 = $5282 of reportable income.  That should show on that  "Qualified Tuition Program (QTP) Computation of Taxable Distribution" worksheet (page 3 line 7).

 

Note the alternative, at my earlier post: have the student report $10,000 taxable scholarship on his return. If he has no other income, the tax will be 0.  You then avoid tax on the $5282.

 

 

 

 

@Hal_Al 

 

Hi Hal -

 

Thanks again for your thoughtful reply.

 

Let me clarify: Box 1 of the 1099-Q ($52,628) already includes the $10,000 scholarship which was awarded by the same University my son is attending; the university reduces our tuition by that amount before we are billed. (The University simply used the scholarship money to reduce the tuition by $10,000.) Without the scholarship, Box 1 would have been $62,628.  Our $52,628 is our actual qualified educational expense.

 

Can you see why I believe that this is a bug in TurboTax?

 

Thanks

I generally try to stay out of threads that already have a choir of responses. But I have to ask the question;

What specifically and explicitly is that $10K difference for? The student needs to log into their online college account and go to the financials section to get a detailed breakdown of:

 - All income received by the school from all sources "in tax year 2019."

 - All expenses that income was applied to "in tax year 2019".

Remember, scholarships/grants are reported in the tax year they are received, and it does not matter what tax year it may be "for". Likewise, qualified expenses are claimed/reported in the tax year they are paid, and it does not matter what tax year is paid "for".

If that 10K difference is applied to anything other than tuition, books and lab fees, then it's taxable income to the student. For example, if the student is an RA and are compensated with free rent in the on-campus housing, that "Free" rent is compensation, and therefore taxable income to the student.

@johnsonweb - You say "Box 1 of the 1099-Q ($52,628) already includes the $10,000 scholarship". I think you mean box 1 of the 1098-T. Then, you say "Without the scholarship, Box 1 would have been $62,628.  Our $52,628 is our actual qualified educational expense."  That may be correct, but it is NOT the way schools usually do it.  And that is why TT is doing it that way. The box 1 amount usually includes all tuition paid, whether by the student/parent or scholarship or loans. You need to verify that against your financial records.

 

If you are correct, the solution to your problem is real simple: just delete the 1099-Q (don't enter it at all). None of it is taxable. If you insist on entering it, In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. Enter $62,628.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

 

 

I had the same issues.  Thank you.  That corrected the issue.  That question should be more visible.