@winndix60
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
You do not have enough QEE to do all three, 100% tax free. So you must forego some of the American Opportunity Credit (AOC) or your student must declare some of his scholarship and/or 529 earnings as taxable income. You get to decide which is best.
In your case, you claim the full AOC and your student should declare some of his scholarship as taxable*. His total income is still low enough that he will pay no tax. Technically, he doesn't even need to file a tax return**. But, you may want to do so to document that the income was declared.
The math:
$11,752 tuition + $5942 R&B = $17,694 QEE. $17,694 - $4000 used for AOC = $13,694 available for scholarship and/or 1099-Q. $13,694 - 11,877 (529 distribution, box 1 of 1099-Q) = $1817 left over QEE for the scholarship. $5224 - 1817 = $3407 of the scholarship is taxable.
*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400). It is not earned income for the kiddie tax and other purposes (e.g. IRA contributions). 529 plan earnings are unearned income and the student would have a lower standard deduction, if he declares the 1099-Q as partially taxable.
**$3407 taxable scholarship + 2400 W-2 income = $5807, which is less than the $12,950 filing requirement for earned income.
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How to enter all that in TurboTax (TT):
On your return, you enter the 1098-T exactly as received. Don't try to enter the R&B (TT will not even give you a R&B screen). TT will give you the full AOC.
On the students return, you should use a work around. First, do not enter the 1099-Q, at all. You know that none of it is taxable. As previously explained, in this thread, you are not required to report receipt of a 1099-Q.
The student enters the 1098-T with 0 in box 1 and $3407 in box 5. That will put $3407 of scholarship income on line 8r of Schedule 1. 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. To make entry, in TT, easier, just change the numbers in boxes 1& 5 to what your records/calculations show. The 1098-T that you enter in TT is not sent to the IRS.
