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maglib · ‎June 5, 2019

IRS Definition of Taxable Scholarships:

You must include in gross income:

Amounts used for incidental expenses, such as room and board, travel, and optional equipment.
Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. However, you do not need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.

https://www.irs.gov/pub/irs-pdf/i1099msc.pdf

Scholarships. Do not use Form 1099-MISC to report scholarship or fellowship grants. Scholarship or fellowship
grants that are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant are considered wages and must be reported on Form W-2. Other taxable scholarship or fellowship payments (to a degree or nondegree candidate) do not have to be reported by you to the IRS on any form.
See section 117(b)–(d) and Regulations section 1.6041-3(n)for more information.

If it is earned income, it should be w-2 income. Examples for teaching a class. But if amount is on 1099Misc in box 7 , then report it as a 1099Misc during the interview. Then enter education expenses in the 1098-T interview and do not consider it scholarship income when you enter your education expenses, it is taxable but your education expenses would reduce your tax liability and allow any education credits (if you enter the scholarship amount here see screenshot, if earned then do not enter as scholarship here, you would be double counting it so for amounts in box 7 do not report under the education interview as you already have it as earned income). If the money is earned income and you have dependents, you may also qualify for EITC.

If it is unearned income such as scholarship or for education only purposes (Box 3 on 1099Misc) it is a optional 3 step process to report (so the IRS sees you reported the 1099 and you negate it and then report it as scholarship, some claim you can just post in education section but the 3 step method will be clearest so the IRS sees the 1099 reported) as follows, note the money is taxable to the extent then only if it exceeds your actual education costs, be clear what the scholarship is allowed for during the interview as if it allows for room & board, you may benefit better from Federal education credits.

To enter the portion for UNEARNED BOX 3 this income in TurboTax Premier follow these steps:

REPORT 1099-MISC

IF box 3 reports, report the form:

STEP 1 (step 1 and 2 are optional to make it clear):To enter/edit a 1099-MISC form:

Open (continue) your return if it's not already open.
In the Search box (top right-hand corner), type “1099-misc’
Click on the Magnifying Glass icon.
Click on “Jump to 1099-misc” link high-lighted in Blue.
Answer the Step-by-step instructions.
fill in 1099-Misc as received
Describe reason "Scholarship reported on 1099-Misc"
None of these apply to me
No it didn't involve work like my main job
I got it in year 20xx
No it did not involve an intent to earn money

STEP 2 (step 1 and 2 are optional): and make adjustment using the steps below:

Federal taxes
Wages and Income
Scroll down to Less Common Income
Select Miscellaneous Income.
Select “Other reportable income”, click ‘Yes’ and you will be prompted to enter Description and amount. Please be sure to write a short explanation such as 1099Misc Scholarship and enter the amount as a negative number. At this point, the form 1040 will show full amount as taxable AND as a negative adjustment on line 21. The end result: form is reported but not taxable

STEP 3 (REQUIRED): Go to Federal Taxes > Deductions & Credits > Education Expenses > Expenses & Scholarships > Click Yes to enter education expenses > Enter the Payer of the scholarship from the 1099-MISC (see the screenshots in the attachment). When entering the 1098-T enter it exactly as received. If you paid more or less than shown (ONLY TUITION & FEES) put the tuitions & fees paid in the area to enter under box 2 TT has a box during the 1098-t. Room & board and books are reported later. Scholarships for other periods will have an interview to allocate to another year (note you must add those scholarships when you file that years tax return as they won't be on the 1098-T).Make sure you enter the whole interview, especially entering other education expenses, and the question about the scholarship used for room and board (you enter all amounts that were NOT used for tuition & fees and required books in this area not just the room and board piece) and the area is only complete when you get to the blue box that you must hit "maximize my education credits"). There is a field in this section about the amount for education credits, any amount in this field utilized for education credits may create more of the scholarship as taxable, you may need to reduce this amount to $0 or $4k, the amount needed to get AOTC) Just a note, to the extent a scholarship covers room & board, or travel or other personal expenses it is considered taxable income thay also may qualify you for education credits paid with taxable income and may result in a better tax situation.

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