1098-T - Lifetime credit when tuition fully covered by a government grant?

[photobug56]

Entering a 1098-T for one of my kids.  He took a training program at a community college, with tuition covered by government grant.  He's had these before, never gotten a 1098-T, but for 2022 he did.  So box 1 say, $3000, box 5, $3000.  Turbotax did the obvious credits analysis, and determined he was eligible for a Lifetime education credit (20%) of the amount.  Great, except that until we got the form, we had no idea what the class cost, and besides, he had no net expense for the class.  I see on Form 8863 how the calculation was done, but I don't understand how one gets a credit when there was no out of pocket.

So 2 questions;

1. Why would the school create the 1098-T this year when it never has for a grant paid for course before?  He did get them from the school when he earned a degree.  Has tax reporting requirements for this changed?

2. How could he 'earn' a credit when he had no net tuition expense?  Is this a quirk in Fed tax law or is there a problem in TT?

3. If I'm right, what is the best way to eliminate the 'credit' in the 1040 - can I simply delete the 8863, or will TT block filing thinking that I made a mistake?

A major tax firm says;

"Since tax-free scholarships don’t have to be repaid, amounts paid for by scholarships aren’t considered paid by you or the student; therefore tax credit for education cannot be claimed."  

Another site says;

"You can claim this credit for any borrowed funds, but not for costs that were covered by a scholarship or grant."

To me this is clearly a bug, and that TT should be applying net tuition expense to determine if it should even ask you about credits, and if it proceeds, only using the net to calculate any credit.

[SantinoD]

For your first question, as long as Tuition was paid, the school will send a 1098-T even if grants, scholarships or student loans were used to pay.  In the past, it is possible that his tuition was paid with waivers, this type of payment is not reflected on 1098-T since a waiver waives the Fees as if they were never paid.

I would double-check your entries for Form 1098-T to make sure you entered Box 5 amount. If Box 5 amount wasn't entered, TurboTax will enter $3k as qualified school expenses paid, therefore qualifying you for the tax credit.

[photobug56]

We didn't pay a penny, we didn't even know what the cost was until the form arrived.  But let's say you're right.  Tax law makes it clear that if you had no out of pocket expenses (here because a grant covered everyone's tuition for this job training program), you are NOT eligible for a credit.  TT should detect this very simple condition and zero out everything for credits and skip the interview and form creations other than the 1098T itself.  So this calculated credit is wrong, and you cannot override it.  To me this is a serious bug in the 1098T processing.

BTW, we've had members of our family go through other grant paid job training classes and never, ever gotten a 1098T for any of them until now.

[photobug56]

And yes, box 5 was entered.  Exact same amount as box 1.

[Vanessa A]

If you did not pay a penny and the tuition was completely covered by grants, then you would not need to enter the 1098-T on your return at all.  

If all tuition was paid by grants, then you would not qualify for an education credit.  Without looking at your return, it is hard to guess why you are seeing a credit.  The best thing to do is to go to Tools>>Tax Tools>>Delete a Form>>click Delete next to the 1098-T.

You can then keep the form for your records, but do not enter it on your return. 

[photobug56]

Thanks for this response.  I'll do as you said.  But I'd appreciate it if engineering could add a test for this situation, and if it comes up, either tell the user to delete the form, or much better, warn the user that tax law does not support any credits, and bypass that part of the script and related code so that no credit gets calculated.  Oh, and report this to the IRS to make sure they don't go and audit taxpayers for missing a 1098T on their tax filing under these circumstances.

[Charger25]

Helping a friend prepare 2024 tax return for a graduate student that has seen this same problem.  Clearly NOT eligible for the Lifetime Learning Credit as all tuition and other qualified expenses are paid by a grant (so tax free).  Student also has a fellowship which does need to be reported and is taxable (non-qualified expenses).  Using the 1098-T (which I have confirmed as correctly prepared by the university), TurboTax makes a mess of things.  I suppose one could skip the 1098-T entry (delete if you already tried to do it) and just enter the non-qualified fellowship info.  You can also "hack" around this by making the adjustment in the "not paid that year" in the scholarship dialogue of TurboTax, which is true, but all of the text around that really speaks to awards that span from the tax year into the future.  So this is still a problem, it really wastes time, and its likely handing out LLC to students on generous grants that just assume TurboTax does not need to be second guessed.  Only fix I found that works is to prepare tax using another on-line tool ... I have tried another one to compare and it handles the situation perfectly.

[KrisD15]

At the end of the Education Interview there is an option to "Maximize my tax break" which will claim taxable income in order to free-up expenses if this results in an education credit when the credit is more valuable than the tax on the additional income. This is allowed and encouraged by the IRS. 

See Pub 970 

Type    letme    into the searchbox to review and deselect the credit if desired. 

Additionally, we are here to address questions and concerns you might.