Q. Can I enter the 1098-T amounts on my tax return as well as his tax return?
A. Yes, if needed.
Q. It is my understanding that in this situation, the parent can put on their tax return just the amount of grant income up to the break even point (in this case, my tax return would show $1,500 in grants and $1,500 in tuition). Right?
A. No. Unless you are claiming an education credit, you do not enter the 1098-T, on your return. He would enter it on his return and TurboTax (TT) would calculate the difference between box 1 and box 5 as taxable income ( reduced by any additional book and computer expenses).
But, wait, there's more.
There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), 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 conditions of the grant are that it be used to pay for qualified expenses.
Using an example: Student has $3000 in box 5 of the 1098-T and $1500 in box 1. At first glance he/she has $1500 of taxable income and nobody can claim the American opportunity credit. But if she reports $3000 as income on her return, the parents can claim $1500 of qualified expenses on their return.
Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket. The parents would then claim $2500 of expenses for the tuition credit. It take $4000 of expenses to get the maximum $2500 credit. $1500 of expenses get you a $1500 credit; $2500 of expenses gets you $2125. It's 100% of the first $2000 and 25% of the 2nd $2000.
The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit". PUB 970 even has examples of how to do the “loop hole”.
Q. How to enter that in TT?
A. It's best to use a short cut. Using the 2nd example ($2500 total expenses and $3000 scholarship). The parent enters the 1098-T with $2500 in box 1 and box 5 blank. The student enters the 1098-T with $0 in box 1 and $3000 in box 5. TT reports the scholarship income ($3000) on line 8r of Schedule 1, of his return.
