Scholarship is producing taxable income against 529 withdrawl

[skil]

1098T has $30K in payments (Box 1) and $10K in scholarships (Box 5).  Full tuition is $40K, but with the scholarship the net cost to me was $30K.  The 1098T does not report the $40K.  I withdrew $30K from a 529K account.   I would expect to pay NO tax on that 529 withdrawl.

On the Student Info Worksheet, in Part VI, the $10K scholarship (Line 19) is being adjusted from qualified expenses of $30K (Line 13), which is reducing my qualified expense (Line 20).  This reduction carries forward to Part VIII (Line 2g), which subjects me to a tax on a portion of the $10K in the rest of Part VIII.

I don't understand this.  I had to pay $30K and I withdrew $30K.  Why is TT count a scholarship against what is already a NET payment on the 1098-T?   If box 1 had the FULL tuition before scholarship, I would understand...  

[SharonD007 · Accepted solution]

You indicated that the amount in Box 1 is $30,000. Box 1 is the total payment that an eligible educational institution received from any source for qualified tuition and related expenses minus any reimbursement or refunds made. Please see the Instructions for Forms 1098-E and 1098-T from the IRS website.

Because there is a scholarship of $10,000 in Box 5 and $30,000 in Box 1, TurboTax calculated tax on $10,000 of your 529 plan withdrawal because the educational institution reported that total amount of received from all sources is $30,000. Since you mentioned that the total cost is $40,000, please reach out to your educational institution and request a corrected copy of the 1098-T. 

Please see the TurboTax article Guide to Tax Form 1098-T: Tuition Statement for more information.

[skil]

Thanks very much appreciate the quick response!  The actual $10K scholarship reported was directly from the school - just really a discount they gave on the full tuition.  Seems like you suggesting the school issue me a corrected 1098-T that has the $40K in Box 1 (I paid $30K and they "paid" $10K ) ?   That does seem to be logical given the link to the IRS page below, which states for Box 1  "The amount reported is not reduced by scholarships and grants reported in box 5."  It seems the school did just that since they only reported $30K.

[JulieS]

Yes, that is correct. Box 1 should be $40,000 if the "scholarship" discount is listed in box 5. 

[Hal_Al]

Be sure you have it straight.  Based on your description, the school shoulda but $40,000 in box 1, if they put $10K in box 5.  Or, they shoulda put $30K in box 1 and 0 in box 5 (since it was a discount/tuition waiver rather than an actual scholarship).

Assuming you are correct, The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. 

However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. If you claim the tuition credit, you do need to report that you got one or that you qualify for an exception (the TurboTax interview will handle this)

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid ($40K in your case). 

 You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip! 

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

[Paddy Winkler]

TT says "This is the actual amount that your school received from you or a lender for tuition and expenses."  They did not receive the scholarship and why it is not in Box 1.  

I have a similar issue I paid $14K out of pocket mathcing Box1 (529) and a $3000 Scholarship is in Box 5.

I don't think what you are correct.

[AmyC]

Hal_Al knows education and is correct the the 1099-Q does not have to be entered when used on qualified expenses and the 1098-T is informational only. You will want to use correct information for filing your return.

Hal_Al is also correct about possibly qualifying for an education credit.

The key is to determine if there is any taxable income or any education credit. If the IRS asks, you can show, this was the taxable amount and why or this is the credit and why.

You have the records and know the amount you actually paid for the many education expenses. What Expenses Qualify at IRS Publication 970, Tax Benefits for Education. Allocate the 1099-Q to room and board first and work your way back to tax credits.

Enter the numbers that you can prove.

[Paddy Winkler]

Yes, but it is TT that is taxing the Scholarship.  How do I get TT to allocate properly?

[MarilynG1]

Generally, if the amount in Box 1 is less than the amount in Box 5, yes, TurboTax will calculate that you have Taxable Scholarship Income.

If the Box 1 amount does not reflect what was actually paid in Tuition, check the box below and enter the correct amount.

If you have a 1099-Q, enter it first, then in Education Expenses, you can add Room & Board cost and other costs not included in Tuition, along with the 1098-T. 

You may want to Delete the student in the Education Section and re-enter. 

You should qualify for the American Opportunity Credit of $2500 to help with the 14K you paid out of pocket.

Here's more info on Why Didn't I Get an Education Credit?

@Paddy Winkler 

[Hal_Al]

@MarilynG1  @AmyC 

Current poster @Paddy Winkler  has another thread going on this topic

https://ttlc.intuit.com/community/college-education/discussion/re-why-is-my-child-s-college-scholars...