Can our daughter claim herself and pay less or can we split the scholarships between our tax return and hers to reduce taxes or qualify for college deductions?

[kc4braves]

My daughter is 19 and CAN be claimed as a dependent.However,she has scholarships paying for tuition,books,fees and some room and board.Waiting on her 1098-T but last year she had to pay. We are just wondering if we are filing the best way. Last year she put the 1098T on her tax return with her PT job and had to pay taxes.

[Hal_Al · Accepted solution]

No. Excess scholarship is taxable income on her return. You are not allowed to shift it to your return. 

You don't really "put" the 1098-T anywhere. You use the info on it, along with your own records, to claim a tuition credit and/or report taxable scholarship.

 There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, as income on his return. That way, the parents   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.

[kc4braves]

How would I go about using the loophole?  Do I need to do a paper return for this or is it possible to do with Turbotax online?

[Hal_Al]

You can file thru TurboTax, online.

In TurboTax, you have to use a workaround. There are several ways to do it. The simplest way is just change the box 5 amount (at the 1098-T screen) to get it to work. Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Using an example. Box 1 is $10,000 and box 5 is $20,000 and you paid $1800 in other expenses. Change box 5 to $8800. That way it appears you paid $1200 in tuition, out of pocket (1800 + 1200 = the $4000 you need to qualify for the maximum AOTC).

On his/her own tax return, your child reports $11,200 (20,000 - 8800) as taxable scholarship. At the 1098-T screen she enters 0 in box 1 and $11,200 in box 5

[kc4braves]

Thanks. I will try this.  I hope I don't mess it up.  Still waiting on the 1098T but may ask more questions later.  Just thinking ahead after  helping her file last year.  I didn't know there was another way so she paid all taxes and nobody got a credit.  

[Hal_Al]

You can both file amended returns for 2017. She to report more scholarship income (about $4000) and you claim the tuition credit

[kc4braves]

She claimed all of the scholarship income last year.  Only one semester was represented because it was freshman year.  Box 5 was $5000 greater than box 1.  

[Hal_Al]

When you say "claimed all of the scholarship income last year", do you mean the entire box 5 amount or only the $5000 difference between box 1 and box 5?
What was in box 1 and box 5?

[kc4braves]

Box 1=$13561, Box 5= $18675.  I followed all the steps that Turbotax asked for her taxes claiming the difference as income.  It was confusing to me but they used our income to determine something about it.  I have always understood our taxes ( I thought) until she ended up, thankfully, with so many scholarships.  My son also has a larger box 5 than box 1 but by a smaller amount.  He graduated in May but we are claiming him this year.  I guess there might be a benefit to filing his differently.  He did not owe taxes last year because his job plus the extra income was less than that required to owe more taxes than paid in.

[Hal_Al]

You can still amend  and get the credit for 2017. But she will also have to amend  to pay tax on an additional  $4000 of scholarship income. The education credit is worth $1000 to $2500 to you. Her tax should be much less.

"It was confusing to me but they used our income to determine something about it". That's the infamous "kiddie tax" where a dependent child's unearned income is taxed at the parent's top tax rate. Scholarships are considered unearned income. The kiddie tax was changed for 2018, under the new law, and will be more costly (trust tax rates are used, not the parent's rate). TurboTax will handle that

[kc4braves]

Great.  I WAS kinda liking the new tax brackets and bigger standard deduction because it seemed like we may not be as hurt by our kids graduating and no longer being claimed by us.  However, I guess that will be seen next year for sure.

[kc4braves]

So my son graduated in May and had a much smaller amount in Box 1...$2760.  This did not include his books. However they would not bring the amount higher than maybe $3000. Does he claim the extra on his return or do we?  He graduated and has been working for 3 full months. So far he will be getting back all that he has paid in.

[Hal_Al]

The tuition credit goes with the student's exemption. If you claim him as a dependent, for 2018, you claim the tuition credit.  If he claims himself, he claims the credit.
So that brings up the question, CAN you claim him?

Graduation year
If he/she was a student (under 24) for at least 5 months and lived with you for more than half the year, and did not provide more than 1/2 his own support for the whole year, you can still claim him. Be sure he knows you're claiming him, so he doesn't claim himself. He can only be claimed once. But, he can "file taxes" without claiming his own exemption.
The real question is who should be claiming him in this "transition" year to adulthood. You two have to agree on who is going to claim his exemption. Each should do their taxes both ways and see which way the family comes out best.  Even then, you have to meet the rules. The rule is that a child of a taxpayer can still be a “Qualifying Child” dependent, regardless of  his income, if:
1. he is a full time student under 24 for at least 5 calendar months of the year (graduating in May usually means you meet the 5 month rule)
2. he did not provide more than 1/2 his own support  (scholarships are considered 3rd party support and not support provided by the student).
3. lived with the parent (including time away at school) for more than half the year

So, it usually hinges on  "Did he provide more than 1/2 his own support in 2017.
The support value of the home you provided is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants. IRS Publication 501 on page 20 has a worksheet that can be used to help with the support calculation. See: <a rel="nofollow" target="_blank" href="http://www.irs.gov/pub/irs-pdf/p501.pdf">http://www.irs.gov/pub/irs-pdf/p501.pdf</a>

[kc4braves]

He lived with us until mid September. We paid everything including his phone, car note and medical (through October) and car insurance.  We even paid to move him and for alot of things he needed to get started.   So he paid none of his support until October. He is only 22.  So we will claim him this year.  It would not benefit him to claim himself anyway and I guess he couldn't anyway since we can.

[kc4braves]

Well, I received my daughters 1098-T and have been trying to add things correctly to our tax return.  I feel like I may have entered something wrong because Turbotax jumped our refund up by $4100 and told us we needed to upgrade to Deluxe to get our credits.  I forgot about the "other" charges which include books so we show $4832 of education expenses leaving $9118 for my daughter to claim as scholarship on her return. I tried to figure out how to reduce our education expenses to $4000 even but don't know how to do that now. Why would our refund jump so much and why do we need more forms?  I added my son and his education info didn't trigger an upgrade or anything.  I do not want to upgrade if I have messed up something but can go no further without upgrading.  Any ideas why the refund jumped so much?