1098-T Help

[Robertsonland]

My daughter went away to college at UNM this year. She is 19 (Freshman) and received a scholarship. We received a 1098-T for her from the school.

Box 1: 4679.06

Box 5: 6929.06

Box 8: Checked

She is going for her Bachelors Degree. I understand they paid her more (box 5) than what she used for school (Box 1)  and entered that on my 1040 in the 1098 section for Education and assigned it to her. 

She had housing expenses that we paid (we didn't explicitly use the 2250 extra to pay them as we used other money due to the scholarship money coming in later than we needed). 

I get the notice that the Education Assistance counts as income and it says "That's because scholarships and other education assistance are considered taxable income. If they exceed the education epxenses. If the money was used to pay for "nonqualified expenses, or if she was not enrolled in a degree, certificate or credential program at an eligible school. She will need to file a tax return to include the 2250 amount taxable income.

So question 1: The statement " was not enrolled in a degree, certificate or credential program at an eligible school" is odd to me since she is enrolled going for a bachelors degree.

Question 2: I saw in other (older) posts that if her income is less than 6100 then she doesn't need to file a return. Her only other income is interest on her education CD that she is using to pay for school and that was only 40 something dollars. 

We claim her on our taxes so  I think I have a handle on that but not sure if she really needs to file a return or not since she didn't have any other income.

[bosso3]

I suspect that the scholarship money may have been used to pay for "nonqualified expenses" or that the money exceeded the "qualified expenses."

These terms are explained here https://www.irs.gov/faqs/interest-divid[product key removed]-of-income/grants-scholarships-student-l... 

and

https://www.irs.gov/taxtopics/tc421 

Regarding whether or not your daughter needs to file I return, I think so.  You can verify this at

https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

Click the "Begin" button at the bottom of the info.

[Robertsonland]

Thank you, I will check out the info.

I understand about the nonqualified expenses it was the statement after about the "was not enrolled in a degree, certificate or credential program at an eligible school" that confused me. She is enrolled. Just those expenses went to pay for the nonqualified expenses (room and board) which I had understood would be income to her. 

I don't know why they included that wording. 

[DawnC · Accepted solution]

If that was her only income (excess scholarship and $40 in interest), she does not need to file her own return.   Be sure to enter her book, materials, and supplies expense on your return as well.   Those are qualified expenses just like tuition is.   The room and board expense is non-qualifying for the purposes of the AOTC or offsetting scholarship income.    Since you are claiming her, enter her 1098-T on your return along with all the other expenses.    That statement about not being enrolled in a degree program is a generic statement reminding you that being enrolled in a degree program is one of the requirements of the American Opportunity Tax Credit.    There is a question that specifically asks if she was enrolled in a degree program - be sure to answer YES to that question.    Although you are seeing it because the scholarship is more than her tuition.   

Qualifications for claiming the American Opportunity Tax Credit are:

• You paid an eligible student's qualified education expenses for higher education at any college, university, or vocational school with a student aid program administered by the US Department of Education
• The eligible student is you, your spouse, or a dependent on your return
• For the full credit, your MAGI (modified adjusted gross income) is less than $90,000 ($180,000 if you're filing jointly)
  • For a reduced credit, your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you're filing jointly)

An eligible student is defined as a student who:

• Is enrolled at least half-time in a program leading to a degree, certificate, or other recognized credential ***
• Had at least one academic period beginning during the year
• Didn't claim the American Opportunity Tax Credit for more than three previous years
• Didn't complete the first four years of post-secondary education before the beginning of the year

[Robertsonland]

Thank you. That is what I was figuring (general statement). I'll double check on her books and stuff but not sure she had any.

[KrisD15]

What DawnC said is correct based on the numbers you provided however, be aware that the program may suggest the student claim more scholarship as income if that frees up expenses for you to apply to an education credit on your return. 

Your credit might be worth more than the tax on the student's income, or the income may still be below the filing requirement for the student. 

Additionally, scholarships claimed as income by a student is considered Earned Income and may be used for contributing to an IRA. 

According to the IRS:

Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive taxable compensation. A scholarship or fellowship grant is generally taxable compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. However, for tax years beginning after 2019, certain non-tuition fellowship and stipend payments not reported to you on Form W-2 are treated as taxable compensation for IRA purposes. T

IRS Pub 970

[Robertsonland]

I entered her 1098-T on my taxes .  

With all of our income we are above the threshold for any AOTC so that wasn't in question at all. Thank you for your help.

[Robertsonland]

Is the 1098-T considered earned or unearned income for my daughter? I would think unearned. I went ahead and ran through the tax filing (without filing) and it mentioned her standard deduction was $2,600. I can see the form online to see what type of income for the 1098-T though so wanted to ask so I can understand.

[AmyC]

Scholarship income is included in the wages line rather than other income.

[Robertsonland]

Ahh ok..thanks for confirming.  Glad I was wrong. Is it better to file even getting nothing back or just leave it be?

[AmyC]

Do nothing. The IRS is always the best source. The IRS has an interactive quiz which includes the definition of earned income and tells you if you need to file. See Do I Need to File a Tax Return?