The interview is complicated and it's easy to make mistakes. It's best if you enter the 1099-Q before entering the 1098-T. This is particularly important to get the Room & board screen.
There are three things you can do with your Qualified educational expenses (QEE):
- Allocate then to scholarships (so that the scholarship remains tax free)
- Use them to claim an education credit
- Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable
The student information worksheet and the 1099-Q worksheet will show how TT allocated these expenses.
It's helpful if you know where you need to get to. And that's the hard part. You want to allocate $4000 of expenses to claim the American Opportunity Credit (AOC), on your return. You want $12,200* of her scholarship to be taxable and the rest of the expenses to be allocated to the 1099-Q to reduce the taxable portion. So, you want to allocate $19,800 of expenses to scholarship (32, 000 - 12200 = 19,800).
You have 17,000 (tuition) + 18,000 (room and board) = $35K expenses (add any book and computer expenses to increase that total). 35,000 - 4000 - 19,800 = $11,200 of expenses allocated to the 1099-Q. 11200 / 30000 = 37.33% of the earning are tax free (62.67% are taxable). 0.6267 x 16,000 = $10,027 taxable income. Most of that will be taxed at the parent's marginal tax rate ("kiddie tax").
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. That gets you the AOC. 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. What you enter is not sent to the IRS
Enter the 1098-T, exactly as received, on the student's return. Enter book expenses and room and board separately. Answer yes to book expenses to get to the R&B screen . When asked how much of the scholarship was used for room and board, enter $12,200. That makes it taxable. 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.
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 return. The alternate workaround is to enter $4000 less than the actual box 1 amount, when you enter the 1098-T
*Taxable scholarship is treated as earned income for purposes of calculating a dependent's standard deduction. A dependent's standard deduction is he earned income + $350, but not more than $12,550.
