1098T- Box 5 exceeds box 1

[Megumi47]

Hi! I cannot figure out what to do. I am a full-time college student and I received my 1098T form from my university yesterday. In Box 5 (My total number of scholarships received), the number is around $24,000. In box 1 (Qualified tuition and expenses), the total number is around $10,000. When I input this information when doing my taxes, it considers that $14,000 difference as income. Taxable income. The problem is I did not receive any of that $14,000 as income. In fact, the full $24,000 was applied to my account and it still didn't cover all of my charges(This includes meal plan and room and board). After the full $24,000 was applied to my account, I paid the remaining balance out of pocket. Turbo tax gives me the option to change box 1, and I thought I was supposed to do that. But I am also seeing that I am not supposed to(according to other threads on here). This is confusing to me as they would change my income for the year from $11,000(How much I made from working and is recorded on my W2's) to $25,000 due to the $14,000 difference from my 1098 T. But like I said above I did not receive this money. I did not get any type of refund and had to pay the remaining balance myself. Does anyone know what to do here?

[KrisD15]

If I understand correctly, only 10,000 went to the school and the remaining 14,000 went to other things, like Room and Board. 

Funds used to pay for Tuition, Fees, Books and Supplies is tax-free.

Funds used to pay Room and Board are taxable to you. 

It is like the 10,000 of the scholarship went to the school to pay tuition.

Then 14,000 WOULD HAVE GONE TO YOU, thus taxable, but rather than go through your hands and back to Campus, the school paid for your room directly.

IRS Pub 970

[Megumi47]

Thanks for responding!

Quick follow up. So the fact I did not receive a refund doesn't matter? With this "Added income" I will now owe money since $14,000 is a lot( And I also worked to pay the rest of my tuition) so I wanted to be sure. 

Second follow up so I can understand: I am essentially paying taxes on the scholarships given by my university for room, meal, and other non-qualified expenses even though I am not receiving any of this money personally and it doesn't cover everything.

[Vanessa A]

Correct.  It does not matter if you received a refund of the money or not.  it sounds like this was a scholarship that had an intended use and could only be used for what it was meant for, which in this case was room and board. Since you received scholarship money and it was used for anything other than qualified education expenses, it becomes taxable income.  The fact that it WAS used to cover those non-qualified expenses is all that matters to make it taxable. It does not matter that the school paid the expenses directly and you never actually touched the money.  

And yes, since you have income from working, if your employer did not withhold taxes from your wages (which they likely did not due to it being below your standard deduction of $14,600) this will likely cause you to owe taxes on the scholarship money that was used to pay expenses other than qualified education expenses. 

How old are you?  Are you still claimed as a dependent on your parents return? If not, it is possible that you would be able to claim the American Opportunity Tax Credit to offset some of the taxes that are owed due to the scholarship since you also worked to pay for the rest of your tuition.  If you used the $11,000 you earned from work to pay for tuition, this could count towards the AOTC.  This credit is worth up to $2,500. If your parents claim you as a dependent on their tax return, you would not be able to claim this credit. 

"Who can claim an education credit?

There are additional rules for each credit, but you must meet all three of the following for both:

1. You, your dependent or a third party pays qualified education expenses for higher education.
2. An eligible student must be enrolled at an eligible educational institution.
3. The eligible student is yourself, your spouse or a dependent you list on your tax return.

Who cannot claim an education credit?

You cannot claim an education credit when:

• Someone else, such as your parents, list you as a dependent on their tax return
• Your filing status is married filing separately
• You already claimed or deducted another higher education benefit using the same student or same expenses (see Education Benefits: No Double Benefits Allowed for more information)
• You (or your spouse) were a non-resident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes (find more information in Publication 519, U.S. Tax Guide for Aliens)" Education Credits AOTC LLC

[Hal_Al]

You can wipe out the tax on all that income because of a loop hole on scholarship income*.  For specifics, answer these questions:

What was your age on 12/31/24?

Do you qualify as your parent's dependent?

Are your parents eligible for the tuition credit (is their income under $160,000 to $180,000 filing jointly $80-90K  single or head of household)?

Is the scholarship restricted. That is, must the first $10,000 go for Tuition?

Do you have any other qualified expenses, books, a computer and other course materials?

*General principle

There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) 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 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.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket. She would only need to report $5000 of taxable scholarship income, instead of $6000.

Second General Principle

While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out.  A full time student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. She cannot be supporting herself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)