Q. I, the parent, choose to treat $3k of my student's grants as taxable income, to claim more AOTC in my tax return and my student does not need to file tax return based what you told me. if my son does not file a tax return, how does the IRS know these information between me and him, and know my son is not required to file a tax return?
A. They don't know. You just hope that you can explain it away if you hear (unlikely) from the IRS. Some people recommend that you have the student file a tax return, even though it is not required, to document his reporting the scholarship income.
Q. Where, in TT, do I make choice to treat part of student's grants as taxable income?
A. I assume you entered the scholarship at the 1098-T screen (box 5). The interview will ask if any was used for room and board, answer yes. Then enter the amount you want to be taxable ($3K, in your case), in the pop up box. R&B are not "qualified educational expenses". So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.
The interview can get complicated, particularly when you're also entering a 1099-Q.
There are a couple of workarounds. First, just don't enter the 1099-Q.
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.
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”.
Second, when you enter the 1098-T, reduce the amount of scholarship, in box 5, by the amount the student will be claiming as income ($3K, in your case). Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. You can skip the questions about scholarship and room & board.
