Form 1098-T. Refund of Tuition and Repayment to VA

[donovant40]

Hello, 

I am looking for help on handling the following situation.  I will use round numbers for simplicity of the example. 

Taxpayer is in the air force reserve and took two graduate courses in 2020.  The VA directly paid the accredited institution $6,000 ($3,000 per course) for tuition.  The taxpayer then dropped a course and the college refunded the taxpayer $3,000.  The taxpayer then refunded the VA the $3,000.  The 1098-T received from the college shows $3,000 in Box 1 (Payments Received for Tuition) and $6,000 in Box 5 (Scholarships and Grants).  Currently the $3,000 refund (difference between Box 1 and Box 5) is being treated Wages, even though the taxpayer refunded the VA during 2020.  All transactions took place during 2020. How does the taxpayer properly reflect this on the 2020 federal 1040?

1) Is Box 5 on the 1098-T improperly overstated or Box 1 improperly understated for 2020?

2) Can the taxpayer subtract the $3,000 refund from the amount shown in Box 5 for 2020 or will Box 6 (Adjustments to Scholarships) reflect this refund on the 2021 1098-T and the taxpayer will need to amend the 2020 return?

[MaryK4]

1)No, the Box 5 is properly reported because the school has to report the amount they received from the VA.  

2) Since the school refunded you and you paid the money back, you can just leave the 1098 entry.  TurboTax uses the entry to determine if you have taxable scholarship income or if you qualify for any of the Education Credits.

[donovant40]

Hi Mary, I'm confused by the answer in 2).  What do you mean by "just leave the 1098 entry".  Did you mean leave out the 1098 so there's no taxable income?

[ThomasM125]

I believe what @MaryK4 is saying is to leave the form 1098-T entry off of your tax return, since it does not accurately reflect what happened.

That would be acceptable, however you may get a notice down the road form the IRS assessing wage income for the missing component where you paid back the tuition.

It might be better to leave the form off your tax return and submit a memo along with your tax return explaining what happened. You would have to mail your tax return in if you did this, however. 

[donovant40]

Ok thank you, that makes sense.  Can I actually expand this a little more to the full situation, since I was just using even numbers in my example?

The amount the VA requested to be paid back was actually slightly lower than what the college refunded to the student.  The college refunded $3,166 but only $2,252 was actually requested to be paid back by the VA.  The $913 difference was to be used for books/course materials.  I would think that $913 would still be needed to be shown as income since that was not paid back (Perhaps taxpayer would then be entitled to claim a portion of the Lifetime Learning Credit based off $913 of expenses). 

Should I just subtract the $3,166 refund from the scholarship amount shown in Box 5, leaving the $913 excess to be treated as income, and I would just file a paper return with copy of the 1098-T and a note explaining the adjustment?  

[AmyC]

The 1098-T is used to determine education credit or taxable scholarships. However, $3000 in box 1 and $6,000 in box 5 does look like there could be taxable income. Please look at another of my answers for help  on manipulating numbers.

You may end up with education credit and taxable income. The credit goes on the return of whoever claims the student. The scholarship income goes on the student's return. If you are claiming the student, you goal is to claim any possible credit on your return. 

For the student, may just want to do this instead, See Where do I enter scholarship income?

It may be that neither of you need to paper file a return.  If questioned, you have the documents to back up what you claim.