1. what difference does it make since it is all unearned income?
A big difference. Not based on the fact the income is unearned. But based on the fact it's paid to s student that qualifies to be claimed as a dependent on the parent's tax return. Weather the parent actually claims them or not is irrelevant. The key word is *qualifies* to be claimed.
Scholarships and grants can only be used tax free for the qualified education expenses of Tuition, books and lab fees. That's it. So if you used any part of a scholarship or grant to pay for anything other than those three qualified education expenses, it's taxable income to the student.
Do not confuse this with 529 distributions reported on a 1099-Q. 1099-Q funds can be used tax free to pay for the unqualified but allowed expense of room and board, provided that room and board was "in direct support" of the education. (If the student did not take summer classes, then the room and board for those months, generally June through August, are not allowed.)
2. When I put the full amount of scholarship money the tax was much greater then when I only put in the room and board amount, why?
All third party income (scholarships, grants, 529 funds) is taxable income *INITIALLY*. It's taxability is offset by the *qualified* expenses it is used to pay for.
I looked at the 1040 with both scenarios, and the amount I enter as room and board is the only amount marked with SCH next too it. I am not sure of the significance of this.
It is indicating that the reason the amount in box 7 exceeds the total of all W-2 income, is because the difference is excess scholarship/grant money (not 529 money) that was used to pay for room and board. Remember, scholarships and grants are tax free "ONLY" if used for the three qualified education expenses I mentioned above. It can not be used tax free to pay for anything else, including room & board. So that part of the scholarship/grant you told the program was used to pay for room and board, is taxable income to the student.
3. How do I determine the amount of room and board if the student lived off campus and a room and board amount is not in their bill from the bursar's office?
Even when the student lives on campus, room and board is "NEVER" included in box 1 of the 1098-T. The 1098-T is for the qualified expenses of tuition, books, and lab fees. That's it, with no exceptions.
Box 5 is for all scholarships and grants received. It does not include 529 distributions, since those distributions are typically paid directly to the named beneficiary recipient of the fund at the time the funds are disbursed from the 529.
Since on-campus living expenses (dorm rent & the separate food plan) are paid to separate entities (Not through the BUSAR) you should have bank statements or credit card statements showing those payments for what they are (rent and food).
If in your case you do have a 529 distribution and that distribution was paid directly to the school, then the school more than likely included that distribution in box 5, which is not wrong for them, but it's an issue for you. So if this is your issue and you have a 1099-Q, I need to know that.
