Education Expenses & 1098T for Parent and Student Filing Separately

[joboos]

Experts,

I have a son in college who files his own tax return due to some earned income and his scholarship unearned income.  I have several questions for this scenario to make sure I'm doing things right.  

- I make too much money to get any of the education credits/deductions

- I do put in my son's college expenses on my taxes to escape paying penalties on my 529 withdrawals

- I do enter in his 1098T and create a student profile for him on my taxes as I still claim him

- On my son's taxes, I put in the difference of line 5 and line 1 of the 1098T on line one of his 1040 (I'm sure there are a few more dollars of books and such, but it won't make much difference and this keeps it simple and easy to prove later on)

- I don't create a student profile on his tax form as i'm not claiming detail expenses on his return

- I also tried the scenario where I didn't claim him any more (only 500 credit for me at this point) and put all education stuff on his, but that didn't change the numbers....

All of this said, does my process sound right?  Anything else I should be thinking about?  Also, if this isn't as straight forward as I wrote, what do i choose to review this with a turbo tax expert?   

Thanks!

[KrisD15]

Yes, from what you describe, the entry seems correct. 

"I have a son in college who files his own tax return due to some earned income and his scholarship unearned income.  I have several questions for this scenario to make sure I'm doing things right."

You later say you are claiming him so I assume he is filing as a dependent. Scholarship income is "earned income" if claimed by the student. You later say you put this amount on the student's 1040 line 1 which is correct. 

If the distribution was used for education purposes, you needn't enter the 1099-Q at all, but entering it and the corresponding expenses does no harm. Remember that a distribution may also be used to cover Room and Board expenses.

Entering the 1098-T into your program is usually done to generate an education credit, which you say you are not eligible for; Therefore again it is not necessary for you to report it, however the program should also advise you from this entry if the student needs to claim income. If Box 5 (Scholarships received) is larger than Box 1 (Tuition Paid) the difference would be the income the student claims, unless the scholarship posted early and will be applied to expenses next year. Of course the numbers would need to be adjusted if you are applying the distribution to tuition. In that case the tuition expense would need to be decreased or the distribution partially taxed. 

If there is tax due on the distribution, that tax is claimed by the Taxpayer named as having been issued the 1099-Q, either owner or student. 

Again, the process you described sounds fine and accurate. 

The "problem" with the education section is that the taxpayer has options of how they want to allocate expenses and payments. The allocation usually has obtaining an education credit as a priority, but since you are not eligible for an education credit, it is irrelevant. 

The only other option I see for your situation is if the student has a large tax liability, he COULD claim the NON-REFUNDABLE portion of the American Opportunity Tax Credit. To do this, you don't claim him, he selects "YES, Someone else CAN claim me" but "NO, Someone else will claim me"

He will still be a dependent (just NOT claimed), but the credit can be used to offset his tax liability. 

Additionally, I cannot say how you not claiming him will affect your tax return. 

IRS Pub 970

[joboos]

Thanks for the quick response.  I've understood what you've said except for the 1099-Q piece.  It is addressed to me and though all of the proceeds are used for allowable expenses (Room/Board, Books, and Tuition) I still enter it or it'll tax me on 100% of the investment gain and penalize me 10% on the amount above and beyond the expenses.  Because of the scholarships my son gets, I withdraw that amount as well, which is allowable without penalty, but exceeds the actual costs that I have.   Does that make sense?  

[AmyC]

Let's back up. and go through your original list and the new.

The laws have changed and more people qualify for AOTC this year.  

The phaseout for  AOTC is:

$80,000-$90,000 or

$160,000- $180,000 MFJ

@KrisD15 is correct, if the 529, 1099-Q, was completely used for college expenses, you do not need to enter the form. Just tuck it in with your tax information. See Turbo Tax article  Guide to IRS Form 1099-Q: Payments from Qualified Education Programs and Publication 970, Tax Benefits for Education.

She is also correct that your son may benefit from claiming AOTC.

If you do qualify for AOTC, then you would see if you can shift more of his scholarship / 529 to room and board to give you $4,000 paid out of pocket for the credit. I realize you said your withdrew more than expenses. Please see my 529 example with IRS information here   and here.  Part of the AOTC is refundable and part of it reduces tax liability. Up to $1,000 is refundable so it could be that the AOTC is split into 2 places on your return. You could have $1,500 on sched 3, part 1, line 3 and then have $1,000 on the 1040 line 29 from the form 8863.

I am also going to recommend you look at another of my answers for help.