It depends. Let's work through it all.
Start with the 1099-Q - If all of it went to 529 qualified Room and Board and Qualified Education Expenses - Internal Revenue Service , tuck it away and do not enter it into the program. The IRS says to only enter taxable forms.
1098-T options:
Determine if you qualify for AOTC. What You Need to Know about AOTC and LLC states: You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers). Ask yourself in you qualify.
- If yes, you can take the credit 4 times and $4,000 of expenses get you the most credit- up to $2500 off your tax liability. Is it worth claiming this year?
- If yes, claim the 1098-T. Claim all of the scholarship income was used for other expenses, not tuition. This becomes passive income to the student. See What is the Kiddie Tax?
- If no, the 1098-T scholarship wipes out the tuition, no credit, no income. Tuck the form away.
If there is taxable income from the Q, it needs to be entered or shifted to tuition and let the scholarship be income. Shifting the income around is allowed. Take the quick quiz, Filing requirement - Do I need to file a tax return? for your student. The kiddie tax on your return may be all that is needed, if at all.
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