Q. It's kind of heart-breaking to realize and say this now but she probably shouldn't have filed a return and this would not be such a problem now - right? Her income otherwise was only $6,125.
A. Correct. But now you get the experience of filing an amended return. You do not have to wait until she does so before you file your return. That can come later. In fact, it is probably not necessary for her to amend. $6125 + 5326 = $11,451 which is less than her standard deduction*; which means her tax liability and refund won't change with the amendment. That said, in this situation (using the loop hole) some recommend filing to document the reporting of the taxable scholarship.
*A dependent's standard deduction is her earned income + $350 (but not more than $12,550). Taxable scholarship is treated as earned income for this purpose.
Q. We didn't receive a 1098-T from the university. They will provide one, however, if we request to have one generated. Should we do that?
A. Yes. then you can say (on form 8863) that you got one.
Q. I also read in several places "Parents: If the student listed on the 1098-T is your dependent, enter the 1098-T on your return, even if your dependent paid the tuition.
A. The implication, in that statement, is that the 1098-T can only be reported on one return. That's not true. It can go on both. It is very common for the parent to use it to claim a tuition credit, while the student uses it to report taxable scholarship. What it's really saying is the parent may claim the credit even though the student paid the tuition.
Q. I'm not understanding now why she should include the 1098-T in her return.
A. She is not "including" it. She is only using the numbers on it to report/calculate taxable income. It's basically an information entry device.
The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception.
