Can someone tell me how to enter taxable scholarship income? Should it be in Parents account or my child account? And how?

[emily1222pinky]

After entering 1098T and education expenses, Turbo tax says my son's education assistance counts as income and need to be filed in my son's Turbotax account. But I have no clue how. I have already enter all 1098T information in parents account, but does my child need to enter the same information in his Turbotax account?

[NCperson]

the 1098-T has the student's SSN on it (NOT THE PARENTS!!!!).  Any scholarship income is the student's responsibility.  

If Box 5 exceeds Box 1, that is income reported BY THE STUDENT. 

if Box 1 exceeds Box 5, there is no income for the student to report and that excess becomes the basis of the AOTC tax credit. 

that is an over generalization, but explains how it works. 

[Hal_Al]

Q. Can someone tell me how to enter taxable scholarship income? Should it be in Parents account or my child account? 

A. Taxable scholarship is reported on the student's tax return. 

Even though the parent has entered the student's 1098-T, on their return, to claim the tuition credit, the student also enters the 1098-T on his return. 

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.

There's yet another (and simplest) work around. Manually calculate the taxable amount of taxable scholarship and enter the 1098-T, on his return, with 0 in box 1 and the  taxable amount  in box 5. In that case the amount in the  "Amount used to claim the tuition  credit" box is 0 (if it comes up).

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.

*$4000 is the maximum amount of expenses needed to get the maximum American Opportunity credit (AOC). The AOC is generally not available to grad students. 

[emily1222pinky]

Thanks, it's very clear.

[emily1222pinky]

The situation can be explained in more detail as follows:

The amount in Box 5 (Scholarship or Grants) of the 1098-T exceeds the amount in Box 1 (Tuition and Qualified Education Expenses). Even after deducting Required Education Expenses from the excess amount, there is still a remaining balance. This means that the excess amount of grants is considered taxable income and must be reported as income in TurboTax.

For example:
If you received a $4,000 scholarship and had $3,000 in qualified education expenses, you would have $1,000 ($4,000 - $3,000) that needs to be reported as taxable income.

👉 However, the question is: How can this amount be added to the "Wages, salaries, tips" line of the tax return without a W-2? Or should it be reported as "Other Income"?

[emily1222pinky]

Thank you for your detailed explanation. 

In our case Grants exceeds tuition and even after deduction required education expenses, there is still remaining balance and it is considered taxable income and must be reported. 

So, the American Opportunity Credit (AOTC) does not apply, but we would like to know how we can add this amount as income in Turbotax...

[NCperson]

@emily1222pinky just add the 1098-T to the STUDENT's Tax return.  If the student is not required to file, then just place the piece of paper in a drawer! 

[Hal_Al]

Q. How can this amount be added to the "Wages, salaries, tips" line of the tax return without a W-2? Or should it be reported as "Other Income"?

A. It does not go in either of those places. It MUST go on line 8r of Schedule 1*.  It gets there by entering it, as described above, in the educational expenses (1098-T) section of TurboTax (TT). Do not enter it in the income section. 

Q.  In our case Grants exceeds tuition and even after deduction required education expenses, there is still remaining balance and it is considered taxable income and must be reported. So, the American Opportunity Credit (AOTC) does not apply, right?

A. No. Or more accurately probably not. 

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 $4,000 in box 5 of the 1098-T and $3000 in box 1. At first glance he/she has $1000 of taxable income and nobody can claim the American opportunity credit. But if she reports $4000 as income on her return, the parents can claim $3000 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 can now claim $4000 for the AOC.

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”.

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

[emily1222pinky]

Thank you so much for all the detailed information and guidance! I really appreciate how thoroughly you explained everything. I didn’t know about the “loophole” method for claiming the education credit, so it was incredibly helpful to learn about it. I’ve learned a lot thanks to your explanations.