Q. Does a dependent 23 Year old College student, who's only income is $73 in saving interest and $2,150in taxable scholarship, have to file a tax return?
A. No. He is under the filing threshold (generally $12,500*).
Q. Should I enter the scholarship income and, possibly, the interest on my return?
A. No. If his only income is from interest and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV, there is a provision for entering it on your return, using form 8814. But since he has scholarship income, he would have to file his own return (if he needed to).
Q. Should he file anyway?
A. Simple answer: no. But if you decide to declare more of his scholarship taxable (see "loop hole" below), to claim the AOTC, then you may want to have him file to document that (but it's still not necessary if the total income is below $12,400.
Q. Should I enter the 1098-T, on my return?
A. Maybe. Not to report scholarship income, but to claim the AOTC. See "loop hole" below.
*You do not report his/her income on your return. If it has to be reported, at all, it goes on his own return. If your dependent child is under age 19 (or under 24 if a full time student), he or she must file a tax return for 2020 if he had any of the following:
- Total income (wages, salaries, taxable scholarship etc.) of more than $12,400 (2020).
- Unearned income (interest, dividends, capital gains, unemployment) of more than $1100.
- Unearned income over $350 and gross income of more than $1100
- Household employee income (e.g. baby sitting, lawn mowing) over $2100 ($12,400 if under age 18)
- Other self employment income over $432, including money on a form 1099-NEC
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There is a tax “loop hole” available. The student reports all his scholarship, up to the amount needed to claim the American Opportunity (tax) Credit (AOTC), 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 $7500 in box 1. At first glance he/she has $2500 of taxable income and nobody can claim the American opportunity credit. But if she reports $6500 as income on her return, the parents can claim $4000 of qualified expenses on their return.
At $6573, he will still not have enough to be required to file. But filing anyway helps document eligibility for the "loop hole".
