Report Tax Free Scholarship Amount that exceeds 1098-T Box 1 Amounts

[mixolydian]

Software: TurboTax Deluxe for Mac

Hi,

I received a 1098-T with an amount in box 5 greater than the amount in box 1. This was because I received a full ride scholarship that covered all qualified tuition expenses and an additional scholarship of ~$600 from another organization. The additional $600 was refunded to me by the school for me to use as I wished. To obtain an educational credit or deduction, I would need to use it for qualified educational expenses:

1. I cannot claim the AOTC against the $600 of scholarship income since the AOTC has already been claimed 4 times for me. 
2. I also cannot claim the LLC against the $600 since tuition and fees are covered by the full-ride scholarship and I don't have any other expenses that must be purchased from the school (see IRS Pub 970, Sec 3)
3. I CAN deduct qualified educational expenses (as defined in IRS Pub 970, Sec 1) to make all or part of the $600 tax free. For example, I purchased course supplies that were required for all students in that class. 

My problem is that TurboTax Deluxe isn't allowing me to use option 3 above. Seemingly, there is no place to include qualified educational expenses  (IRS Pub 970, Sec 1) when they are 1) not AOTC eligible, 2) not LLC eligible and 3) not included on a 1098-T. Such expenses would include tax free purchases that are required for coursework but aren't purchased from the school.

Again, putting these expenses in the "Other Educational Expenses (for all schools)" --> "Books and materials not required to be purchased from the school" box doesn't help since this box is for the AOTC.

Suggestions are much appreciated.

[NCperson]

@mixolydian  t

Look at Worksheet 1-1 in the link your provided.  The result of that worksheet is the only thing you need to report.   From your description, the result should be zero and there is nothing to report on the tax return. (i.e. the QEE exceeds the scholarship income).

Unlike W-2s or 1099's, form 1098-T does not ncessarily need to be reported on a tax return.  

[mixolydian]

@NCperson , thanks for your response. My situation is that box 5 exceeds box 1. That is, the scholarship amount exceeds the amount paid to the school in qualified tuition and fees. I need to know where to report this otherwise taxable income when it was spent on tax free expenses such as books and supplies. 

[Hal_Al]

Q. I need to know where to report this otherwise taxable income when it was spent on tax free expenses such as books and supplies? 

A. Enter the 1098-T.  A follow up question will ask "Did you pay for Books or Materials to attend school".  Answer yes. Fill in the amount in the drop down box that applies, "Books and Materials Required to be purchased from the school" or "not required to be purchased from the school".    That will keep the $600 from being taxable. 

[mixolydian]

Isn't that box specifically for the LLC (hence the "required to be purchased from the school")?

When I do that, the expenses are incorrectly used to qualify for the LLC. Since my expenses were not purchased from the school they are qualified with respect to the tax deduction but not with respect to the LLC.

There should be a way for me to input expenses that are not eligible for the LLC but are tax free. 

[Hal_Al · Accepted solution]

Q. Isn't that box specifically for the LLC (hence the "required to be purchased from the school")?

A. Yes, primarily. But not only for that.  TurboTax (TT) will apply that amount to scholarships, before applying it to the LLC.

But, whether you enter the book amount in the required to be purchased from the school box  or the not required box, TT will apply the money to the scholarships you entered (usually in box 5 of the 1098-T), unless you tell it otherwise. 

Simple example: Box 1 of the 1098-T is $5000, box 5 is $5600.  You enter $600 of book expense.  TT treats all the scholarship as tax free and does not claim the LLC or AOTC.  If you're getting a different result, you've entered something wrong.  Delete the student and start over. 

Better yet, The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return (or in TurboTax).  If you know none of it is taxable and you can't claim a tuition credit, just don't enter the 1098-T.  In the example, in the previous paragraph, TT would put nothing about the 1098-T on the actual tax forms. 

Unless you have a restricted scholarship (certain amounts must be used for tuition), it's optional how the scholarship money is applied.  That is, you can opt to claim the tuition credit by declaring some of the scholarship as taxable income.  This makes more sense for those eligible for the more generous AOTC, but can work for the LLC, depending on your tax bracket.  

[LauraBB]

I see replies for this that don't answer the question of where to report the income.  Turbo Tax is telling me I have to report a specific amount  onto my son's tax return, but need to know where to report the income from tax free scholarship received.

[Hal_Al]

Q. Turbo Tax is telling me I have to report a specific amount  onto my son's tax return. Where do we report the income from tax free scholarship received?

A. On the student's return, In TurboTax (TT), enter at the same place you entered the 1098-T, on your return:

Federal Taxes Tab (Personal for H&B version)

Deductions & Credits

-Scroll down to:

--Education

  --Education Expenses and Scholarships (1098-T)

Since you already know the amount, the simple thing is to just enter the 1098-T with that amount on box 5 and 0 in box 1. Enter no other numbers.. That will put all his excess scholarship as income on his return (line 8r of Schedule 1). 

Alternatively, you can go thru the whole interview and hope TT comes up with the same answer. 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 the same amount you used on your return (usually $4000).