EDIT: 2/5/2017 This post is over two years old, yet folks still seem to be finding it first in their searches. So I went ahead and updated it with the information for the 2016 tax return. It does apply to returns back to 2012 in case you're filing or amending a past year's return. (Returns prior to 2013 can't be amended unless you will OWE tax. and you can't use the TurboTax program for 2012 or earlier returns.)
College Education Expenses
Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:
- Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*
- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.
Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.
Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”. The first one indicates a choice. The second one provides no choice.
If the student:
Is under the age of 24 on Dec 31 of the tax year and:
Is enrolled in an undergraduate program at an accredited institution and:
Is enrolled as a full time student for one academic semester that begins during the tax year, (each institution has their own definition of a half time student) and:
the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)
The parents will claim the student as a dependent on the parent's tax return and:
The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:
The parents will claim all educational tax credits that qualify.
If the student will be filing a tax return and:
The parents qualify to claim the student as a dependent, then:
The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.
Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.) Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.
In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.
If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6200, then the student doesn’t even need to file a tax return, and nothing has to be reported.
If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.
Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6200, then the student should file a tax return so as to get those withheld taxes refunded.
First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to line 21 of the 1040 with an annotation of "SCH" next to it.
Next, 520/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is transferred to line 21 of the 1040 with an annotation of "SCH" next to it.
Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.
When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.
Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over that are taxable, then while the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.
1. Can we claim that 1098-T on our return?
2. I assume she has to file her own return too as greater than $600 from the 1099-MISC or does she claim the 1098-T, which and who needs to file what on who's return?
The "more than $6100" part doesn't apply, because she has self-employment income that exceeds $400 and is subject to the SE tax.
Your daughter will still select the option for "I can be claimed on someone else's return", since I'm sure there's no question that your daughter did not provide more than 50% of her own support in 2014.
Now to answer your question - On the student's tax return select the Personal Info tab and elect to edit the primary tax filer's (which of course, is the student) information. Work it through, and on one of those screens will be a checkbox for "Someone else can claim [NAME] on their tax return". Select it, and then finish working through the rest of the screens, so your selections will "take".
Finally, in case it helps clarify for you or anyone else reading this thread...........
Take note that in IRS Pub 970 there is NO requirement for the parent to provide more than 50% of the student's support. The requirement is on the student. That requirement is, if the STUDENT provided LESS than 50% of the STUDENT'S OWN SPUPORT, then the parents qualify to claim that student as a dependent. The publication also specifically states that scholarships and grants do NOT count as the student providing their own support.
Therefore, if the student received $80,000 in scholarships, used $20,000 of it to pay qualified education expenses, and used the remaining $60,0000 to live off of for the entire year, the student did NOT provide more than 50% of the STUDENT'S own support, and the parent's qualify to claim that student as a dependent. The fact that the parent's may not have contributed one penny to the student's support during the tax year is irrelevant and does not matter one iota. THe parent's still claim the student as a dependent, and in this specific scenario, the student will report all the education stuff on the student's tax return. That means the student will pay the taxes on the excess scholarships and grants that were NOT used for qualified education expenses.