2023 tax question

No, a scholarship is a hybrid income. It is used to determine if you need to file a tax return and is considered unearned income for the kiddie tax. What is the Kiddie Tax?

You can also do a quick quiz, Filing requirement - Do I need to file a tax return? by the IRS every year to ensure your actions are correct.

Q.  Does he need to file 2023 tax return in order to report the 1098-T about the excess scholarship as income?

A. No, because it is less than the $13,850 (2023) filing requirement. 

But, 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 $21,000 in box 5 of the 1098-T and $10,000 in box 1. At first glance he/she has $11,000 of taxable income and nobody can claim the American opportunity credit. But if she reports $15,000 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 $14,000 of taxable scholarship income, instead of $15,000.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.

So, you may want him to file a 2023 return, so that you can amend your 2023 return to claim the tuition credit.