Q. t sounds like we could have my son claim the 1098-T on his tax return instead? And then he is taxed for the scholarship at a lower rate (or not at all, if he makes less than a certain amount?)? Is something like this possible?
A. Yes, that's the way to do it. Taxable scholarship must be reported on his return, not yours.
Q. How would we do that?
A. Simple way: enter the 1098-T on his return with box 1 blank and the scholarship amount in box 5. TT will treat it as taxable. Otherwise, enter the 1098-T, as is, when asked if any of the scholarship was used for room and board, answer yes and enter the amount. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.
Speaking of room and board, room and board are qualified expenses for the 1099-Q, even if the student lived at home, as are books and a computer.
You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!
References:
- On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
- IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.
