1098-T and taxable scholarships reporting

[catkik]

My daughter received more scholarships this year than her qualified educational expenses. All of her college expenses are paid by the scholarships. She also had a paid internship summer 2024 and received W-2. We claim her as a dependent. We did not pay any of her educational expenses. She has to file taxes because of her income from an internship and scholarships. 

Who reports information on scholarships and educational expenses? Who reports 1098-T? Do we, parents, report her scholarships/expenses on our taxes? or does she report it all?

We did not pay any of her educational expenses. Everything - tuition, books, room and board got covered by her scholarships. So we cannot qualify  for any educational credits. 

Thank you!

[AmyC]

1. Credits go to the parents, income to the students.

2. You might both end up reporting the 1098-T. Parents for credit, student for income.

This can go two directions:

1.  The IRS has a great brochure that explains how scholarships and tax credits interact. You may be able to claim education credit, if you qualify, despite not paying anything. You would claim up to  $4,000 tuition paid for a large credit on your return while she pays a little extra tax on hers.

2. If you don't qualify for a credit, it all goes on her tax return.

 What You Need to Know about AOTC and LLC states:

• You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
• You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers)

[catkik]

Thank you, Amy, for your response.

Let me verify a little more specific information from you, if you don't mind.

1. With the internship, my daughter earned $12,600 and she paid $900 in federal tax and some $450 in state.  With all the scholarships that were not used for qualified education, it turned out to be $17,000, which TurboTax added into her total income to be $30,000. So it is calculating that she owns additional $790  in federal and $500 in state. 

These numbers just look very high in my humble opinion and make me wonder if I am doing something wrong. She is a student after all, and we did not expect so much tax to pay.  

Does that sound right for you? 

2.  I will play with AOTC - we do qualify for it based on the total income. It just does not settle with me to ask for it if we really did not pay for any of her expenses. 

Thank you. I would appreciate your advice.

[KeshaH]

The federal tax liability seems correct assuming she's filing Single. Without knowing the state, I'm unsure if the state liability makes sense. There are no special tax rates for students, so she'd be taxed the same as any other taxpayer with the same amount of income.

To qualify for the credit, she'd need to have $4,000 in educational expenses that aren't covered by tax free scholarships. If you add an additional $4,000 of scholarship income to your daughter's taxable income, you will be able to take the credit since you meet the income requirements. It will be the same effect as if she received the money and paid out of pocket herself.

[catkik]

Thank you! 

Another question I am struggling with is with the question that TT is asking:

How much of the total scholarships received was not designated for 2023 expenses? Since it was her Freshman year, the school reported scholarships received and tuition paid for both Fall 2023 and Spring 2024 expenses. Do I need to calculate what part of that total scholarships received is actually for Spring 2024 expenses and input that here? And what do i do with that amount the following tax year? Do I add it to total scholarships received? 

Can I just leave that TT question with the answer NO? 

The way the school processed 1098-T form for 2023 is puzzling to me and is throwing me off this tax year. They did mark that the expenses were for the academic year. 

Does it mean that room and board expenses my student had also need to be applied the same way the school calculated tuition cost? 

[AmyC]

1. It depends. 

• It the tuition includes the spring amount and the scholarship is there to go with it, no need to change anything. Your child gets extra money for room and board.
• If the tuition is only for fall and the scholarship is fall and spring, then you can adjust the scholarship amount and add it back next year to the total received. No requirement to adjust. 

2. You can just leave the answer as no, no adjustments needed.

3. No. The room and board go with the scholarship, not the tuition.

If tuition is $10,000 and scholarships are $15,000 it covers the tuition and some room and board. Depending on the school, some room and board gets pretty high and the scholarships get large.

[Hal_Al]

Q. Who reports information on scholarships and educational expenses? 

A. In this case, the student enters the 1098-T on her return in order to enter the scholarship as income and get it to line 8r on Schedule 1.  If you end up claiming the AOTC (and it sounds like you should), you will also enter the 1098-T, on your return, with adjustments.

Q.  So TT is calculating that she owns additional $790  in federal and $500 in state. These numbers just look very high in my humble opinion and make me wonder if I am doing something wrong.  Does that sound right for you?

A. Yes. 

Q. It just does not settle with me to ask for the AOTC if we really did not pay for any of her expenses.

A.  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”.  EVERYBODY is doing it, most without the student actually paying any tax. She will be adding $4000 more taxable scholarship to her tax return (about anther $480 in tax) so you can get a $2500 credit.  She could actually get about $1800 by claiming it on her return, instead. But, the family comes out about $1200 behind (you would have to forego claiming her as a dependent and the $500 other dependent credit).

Q.  Do I need to calculate what part of that total scholarships received is actually for Spring 2024 expenses and input that here?  Can I just leave that TT question with the answer NO? 

A. Yes, answer NO.  This is because the school correctly reported BOTH spring  tuition and scholarship on the 2023 1098-T. 

Q. Does it mean that room and board expenses my student had also need to be applied the same way the school calculated tuition cost? 

A. Room and board are not relevant, unless you had a 529/ESA distribution. 

[Hal_Al]

  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 $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 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. She would only need to report $5000 of taxable scholarship income, instead of $6000.

The IRS actually encourages use of this technique. 

[catkik]

Thank you for the answers. 

If we parents claim AOC on our return, How do I add $4000 on my student's return? Do I add it as additional scholarships received? 

[catkik]

Thank you for your help! Very valuable information and great explanations!

On 2023 1098-T, the school marked box 7, as tuition reported for the academic year. All of the scholarships but one (which was a state tuition scholarship) was reported as received in 2023. But the state issued tuition scholarship for Spring 2024 was not reported in 2023 and is now added on 2024 1098-T without the tuition going with it. The tuition for Spring 2024 was already reported in 2023. 

I am not allowed to report Spring 2024 tuition any more in 2024, right? 

Thank you!

[Hal_Al · Accepted solution]

Q. I am not allowed to report Spring 2024 tuition any more in 2024, right?

A. Right. But you are allowed to report that as "scholarships received was not designated for 2024 expenses.

Q. If we parents claim AOC on our return, How do I add $4000 on my student's return? 

A. There are several ways it can be done, including  adding it as additional scholarships received.

Enter the 1098-T, on your return, but only enter $4000 in box 1. No other numbers. You only enter the 1098-T to get TurboTax to check the proper box on form 8863. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. The 1098-T that you enter in TT is not sent to the IRS.

Enter the 1098-T, exactly as received, on the student's return. Enter book and computer expenses separately.  In his interview, you should eventually reach a screen called "Amount used to calculate education credit" (or similar wording).  Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return (line 8r of Schedule 1).

Be advised some people are saying they're not getting the "Amount used to claim the tuition credit" (or “Education Expenses used for a Tax Credit”) screen on the dependent’s interview.  Check the student information work sheet (part VI, line 17) to verify it was entered.  If not, the alternate workaround is  to enter $4000 less than the actual box 1  amount, when you enter the 1098-T (or $4000 more to scholarship in box 5).

There's yet another (and easiest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount  in box 5. Enter no other numbers. In that case the amount in the  "Amount used to claim the tuition  credit" box is 0 (if it comes up, it shouldn't).

Before doing that, it may be helpful to first delete the previously entered 1098-T and start over, so that there's not conflicting data still hanging around. 

[catkik]

Looking over her 2023 and 2024 1098-T, here is what I am seeing. 

On 2023 1098-T , the school reported in Box 1 tuition paid for Fall 2023 and Spring 2024 (academic year, instead of tax year) -$11250.  In box 5, the school reported private scholarships but did not report Hope scholarship (that is specifically designated for state tuition for Spring 2024. Most likely, the school did not receive this state scholarship in 2023, so they did not report it in total scholarships received in 2023 (box 5).

They reported it though on 2024 1098-T. It is in the amount of $5129 and specifically applied to the semester of tuition at this state school.  

We used the numbers off 1098-T as reported by the school on the 2023 tax return. 

On 2024 1098-T, the tuition paid (Box 1) is only for Fall semester ($5758) and total scholarships received include all the ones received in 2024, including that Hope scholarship I mentioned above. 

Going through TT questions on Deduction and Credits for 2024 tax return, I am using again all the numbers as provided by the school 1098-T. Then I come to this question: 

How much of the total ($20,000) received in scholarships, grants or other aid was not designated for 2024 expenses?  

Can I answer Yes - and show the amount of $5129 in this box? 

My reasoning is that this scholarship was received in 2024, but the tuition expenses it is designated for were reported in 2023.  Is it a correct reasoning based on what i see on these 1098-T forms? 

Please, explain if it is not correct. Thank you very much! 

My concern is if I do this, I would need to amend 2023 tax return somehow???

[AmyC]

You are correct that since  the scholarship was for a different year, it can be subtracted. The issue becomes that it needs to be added to the 2023 scholarship amount. If that affects your return, then you would need to amend. Or, if it creates more income for the student, they can amend.

If you took the education credit, give it to the student as income. A few dollars of taxes is much better than thousands lost on your return. You only need $4,000 of student tuition on yours. See What You Need to Know about AOTC and LLC.

The IRS has a great brochure that explains how scholarships and tax credits interact.

[Hal_Al]

Q. Can I answer Yes - and show the amount of $5129 in this box? 

A. No. It doesn't matter when it was reported. It matters when it was used. The $5129 was used for 2024 tuition. 

The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return.  You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T.  If you find it easier, just change the numbers in boxes 1& 5 to what your records show. The 1098-T that you enter in TT is not sent to the IRS.

Unless you mistakenly used that $5129 in calculating your 2023 tuition credit, you shouldn't need to amend your 2023 return. 

[catkik]

The scholarship ($5129) is actually reported for the right year when it was received - in my case it is 2024 - In other words, it was received by the school in 2024 and it applies to Spring 2024 tuition. But the tuition expenses for Spring 2024 was reported by the school on the 2023 1098-T - I was puzzled by it last year, but used it as it was reported. So I imagine it lowed my student's taxable income. 

This year, the school reported this scholarship ($5129) in the total scholarships received in 2024 - which is correct. And it is for 2024 tuition expenses. But the tuition expenses were reported last year in 2023. So the tuition expenses the school reports is only for one semester Fall 2024 and not both Spring and Fall 24, which is more logical for a tax year. So she has quite a large taxable scholarship income this year because of it. 

So if I were to adjust the tuition paid in 2024 to include both Spring and Fall semester, then I would also have to amend last year taxes to exclude the Spring 2024 tuition paid (that the school reported on 1098T and I used in her tax return for calculating the taxable scholarship amount), right? 

Do i make sense? 

thank you both for trying to help me in this messy situation!

By the way, we don't qualify for AOC right now. So I am just trying to process these scholarships versus educational expenses in the most favorable way for my student.