I am a university student and on my 1098-T form, my grants/scholarships exceeds my tuition expenses. My parents claimed me as a dependent so do I file that 1098-T form or does my parent?

[Critter]

You do and the excess box 5 amount is considered taxable income on your return BUT if that plus your other income  is $12K or less you have nothing to worry about.

[Hal_Al · Accepted solution]

Simple answer: yes. Since your grants exceed your qualified expenses, you have taxable scholarship income.

Unfortunately, taxes aren’t simple.

First, if you have less than $12,000 of income**, including the taxable portion of the scholarship, you do not need to file a tax return, so none of it will actually be taxed. 

Books and other course materials, not shown in box 1 of the 1098-T will further reduce the taxable amount

Second, There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, 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 2. 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.  If you use this technique, both the parents and the students "enter" the 1098-T, with some adjustments.

**If you have investment income (interest, dividends and capital gains) of more than $350 and total income of more than $1050,  you still have to file, even if your total income is less than $12,000; although little or no tax will be owed.

[FrustratedMom]

@Hal_Al ,

You write:  But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.  If you use this technique, both the parents and the students "enter" the 1098-T, with some adjustments.

What are the adjustments both the parents and students make "entering" the 1098-T?  How is this done?

[Hal_Al]

@FrustratedMom 

You essentially have to use a work around in TurboTax (TT). Here's how I would do it. Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Enter the 1098-T, exactly as received, on the student's return. In his interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.  

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s interview . The alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T on the student's return or $4000 more in the box 5 amount.