Dependent's taxable scholarship in Turbo Tax

[bythebay-]

Where do we enter our dependent son's taxable scholarship amount on his 2023 tax return in Turbo Tax?

I have already filed our taxes and entered his 1098-T info there.

There is a portion of his 2023 scholarship which is taxable.

While doing my taxes, Turbo Tax told me the amount and alerted me that, on his taxes, his taxable amount shouldn't go in the "Wages/Income" portion , but should go in "Education Expenses & Scholarships."

Now that we're in his Turbo Tax, it is hard to know exactly how to make that happen.

Where (and how) exactly does he enter his taxable scholarship amount in 2023 Turbo Tax? 

Specifically, is this through an interview or some other way?

And does he need to enter his 1098-T? 

(i.e., as a dependent what portions of the interview does he ignore and which does he need to focus on regarding education?)

Thanks in advance for shining a light on the path.  

[bythebay-]

Still not sure where to put this taxable scholarship in dependent son's Turbo Tax.

Does he enter his 1098-T?

Do we do it through an Turbotax interview in education? or a direct-to-a-form method?

[Hal_Al]

There's a simple way to do it.  Enter in the educational expenses and scholarships section. When asked to enter his 1098-T, enter it with box 1 blank and the taxable amount, previously calculated (on your return) in box 5.

That amount should appear on line 8r of Schedule 1. 

That assumes, you agree with TT's calculation.  If you're not sure, provide some numbers and I'll review them.

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  So, this means if that is his only income, he does not need to file if it's less than $13,850.  But, you may want file anyway, to document the reporting of the income, that allows you to claim the credit, on your return. 

[Hal_Al]

There is a tax “loop hole” available. 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 school’s billing statement specifically shows the scholarships being applied to tuition or 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.

[bythebay-]

Thank you, @Hal_Al .  We will try that in the next day or so.  Your info is really appreciated!  Thank you for taking the time.

[bythebay-]

Yes, @Hal_Al , that worked.  Thank you.

So, if someone else is reading this: 

I had a kid who earned more in scholarships than got used for tuition (on 1098-T Box 5 was bigger than box 1).

I had entered his 1098-T on my taxes, but he needed to pay taxes  on the difference on his taxes (or at least report it).

Here's what we did (and it worked!):

In turbotax doing our dependent son's taxes, we entered his 1098-T in the Education section (not wages/income section) of the interview (and had to go through all their questions trying to see if he was going to qualify for a tax credit even though we KNEW he wasn't because he is a dependent). 

All we knew after going through the education interview was that he didn't qualify for a tax credit (duh-- we already knew that).

It wasn't until we looked at his actual tax form (after paying...) were we sure that turbotax put that into his taxable income. But it was there. 

Hope this helps someone else.  (I wish turbotax had been more specific when doing MY taxes as to how to go about entering it in his tax forms.  When doing my taxes, turbotax said that he'd have to report it "in Education not  in Wages", but turbotax didn't say enough details to be helpful... it should have said, "just proceed through all the tax credit interview questions as if you are looking to get a tax credit but don't worry we'll plug that taxable amount transparently into the right place when all is said and done." 

Thanks again, @Hal_Al !  Your info was just what I needed to give it a try.

[jcanchon1973]

Hello Hal,

I really need your help in regards to my daughter's 1098-T Form. Box 1 amount: $15,827.64, Box 5 amount: 20,493. She has W-2 in total of $5,567 and interest in the amount of $$53.71. How do I enter the information on Turbo Tax if my daughter uses $7,277.36 as income on her tax return (for taxable scholarship income) so we can take the American Opportunity Credit? She would still be under the income threshold so she will not have to pay taxes. I came to this amount by 20,493 - 15,827.64 = 4,665.36 + 4,000 = $8,665.36 - 1,388 (laptop and book) = $7,277.36. I think I figured this right. 

Thank you,

Jennifer

[Hal_Al]

Yes, your numbers are right.  $7277 + 5567 + 54 = $12, 898 Total income.  That is less than the $14,600 filing threshold and standard deduction*, so, as you surmised, none of it will be taxed.

You enter the wages at the W-2 screen and the interest at the 1099-INT screen.  For the scholarship income, the simple method is to enter the 1098-T, in the educational expenses and scholarships section,  with 0 in box 1 and $7277 in box 5.** That will put all her excess scholarship as income on line 8r of Schedule 1.

*Technically her standard deduction is her earned income + $450, but not more than $14,600. 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).  

** The long way:

Enter the 1098-T, exactly as received, on the student's return. Enter book and computer expenses separately.  In the 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 her excess scholarship as income on her 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.  That and other complications is why I recommend the short cut. 

[jcanchon1973]

Thank you so much for your fast reply. So I'm currently on my return (not my daughter's) and it's saying I don't qualify for education credit because #5 Box is greater than Box 1. I entered the 1098-T exactly with Box 1: $15,827.64 and Box 5: $20,493. I tried earlier to talk to a specialist live but they informed me that I had to enter the amounts exactly on what's on the form. I tried to explain to him about the tax "loophole" but didn't understand me. I'm not sure what I'm doing wrong. 

[Hal_Al]

The short cut: On your return, enter the 1098-T with $4000 in box 1 and box 5 blank. 

The long way isn't  much longer.   To make some of the scholarship taxable, you re-allocate some of the scholarship away from tuition to non qualified expenses (mainly, room & board).  In the 1098-T interview, you will reach a screen asking if any of the scholarship was used for R&B.  You must tell TT how much you want taxable by saying that much  ($7277 in your case) was used for room &board. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B. 

The problem is that it is not  clear in TurboTax.  At that screen, "Did (student name) pay for room & board with scholarship or grant" there's a link "Is there a way to increase my credit" . If you click on that, it basically  explains the loop hole technique. 

[MK151]

Hello, 

If I leave the box 1 empty in my son's return and just put all scholarships in box 5, where do I actually enter his tuition expenses? I am thinking since my son had a job he could file as independent and hopefully can get the educational credit himself? Here is his numbers: w2-$4500, 1099Nec $3000, tuition(box1) $6500, all scholarships (box 5) $28500. I tried to leave box 1 empty and put only box 5 in the 1098T, but then I couldn't figure out where else to enter his tuition so he can get the edu credit.. Am I getting something wrong?

Thank you so much for helping!

[DawnC]

His tuition should be entered in Box 1.   After you enter the 1098-T, you will be prompted to enter 'other' educational expenses (books, supplies, etc.)  You have to have more education expenses entered, than you do scholarships, in order to get an education credit.  

Education Tax Credits  @MK151 

[Hal_Al]

Q. I am thinking since my son had a job he could file as independent and hopefully can get the educational credit himself? 

A. No, that is not allowed.  Congress wrote the law for parents putting kids thru school. See next paragraph. Furthermore, you can't just claim to be independent. You must meet the rules.  A student with those numbers can't be independent. 

There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit. 

You cannot claim the (up to) $1000 refundable credit if you are, or can be, claimed as a dependent by someone else.

Reference: Line 7 instructions for form 8863.

https://www.irs.gov/instructions/i8863#en_US_2024_publink53002gd0e674

That said, to answer your question: putting 0 in box 1 only works when the parent is claiming the credit. In that case, the student is only reporting taxable scholarship income.  For a student (typically over 23), who can claim a tuition credit, it can be done easily in the interview. When asked how much of the scholarship was use for room and board, increase the amount by $4000.  In your  example, he enters the 1098-T as is ($6500 in box 1 and $28,500 in box 5).  $22,000 (28500- 6500) would normally be taxable.  At the  how much of the scholarship was use for room and board, enter $26,000 (22,000 + 4000).  Note the wording at that screen “or other expenses”. You didn’t have to literally use that much scholarship for R&B. That leaves $2500 for tuition. 6500 tuition -2500 paid by tax free scholarship = $4000 of tuition can be used to claim the ed credit.  Id you has other qualified expenses (books and computer), you would adjust the numbers for that. 

[MK151]

Thank you for the explanation, now it is clear to me. And if the parent doesn't claim the edu credit, then the difference between box1 and box 5 gets included in the student's taxable income along with w2 and 1099.

In general, is there a borderline of wages and earned income in order a college student to be considered independent or as long as he is under 24 and with scholarships he is considered dependent?

Thank you!

[MK151]

Got it, thank you.