I am preparing my son's 2020 return. He is not a dependent, and files single. He received a 1098-T and box 1 shows $15,503.28, but the actual amount for qualified tuition is $13,838.95. Box 5 shows $15,315.65, which is correct.
He received the following amounts to pay for his educations expenses: Loans $7,176.00; Scholarships $9,683.65, and Grants $5,632.00, for a total of $22,491.65. He received a refund of $8,652.70 ($22,491.65 - 13,838.95).
Per the instructions for Form 8863, it is my understanding that we can choose which funds to apply toward his Qualified Education Expenses and which funds to apply toward other expenses (i.e. room and board).
If we choose to apply the $9,683.65 in scholarships toward his Qualified Education Expenses of $13,838.95, and assume a portion of his loans cover the remainder of these expenses, I believe that will make his Adjusted Qualified Education Expenses $4,155.30 ($13,838.95 - 9,683.65), which will be reported on Line 27 of Form 8863 (limited to $4,000). Is this correct?
The remainder of his loans and his grants will be considered applied to room and board. Of this, the grant amount of $5,632.00 would be included in income. Is this correct?
Assuming the above questions are correct, how do I report this information in Turbo Tax so that it is displayed properly on his tax return?
Thank you for your help!!
Yes, that is fundamentally correct.
The calculations can be simplified: $13,839 of qualified expenses less $4000 used for the American Opportunity Credit (AOC) = $9839 can be covered to tax free scholarships and grants. $15,316 - 9839 =$5477 of the scholarship/grant is taxable.
The taxable amount can be reduced further by any book, computer and other course materials not already include in the $13,839 of qualified educational expenses.
How to enter in TurboTax (TT): $13,839 in box 1 at the 1098-T screen, $15,316 in box 5. When asked how much of the scholarship was used for Room & board, enter $5477. TT will automatically apply the $4000 difference to the AOC.
That question answered, brings up another question:
How is your son not your dependent? Scholarships and grants are not considered him supporting himself. Only loans in his own name (no parental co-signing) are considered self support. How old is he? Is he a full time student? Does he have earned income. There are restrictions on students, under 24, without earned income, getting the refundable portion of the AOC.
This is actually my soon-to-be son-in-law, so he isn't my dependent. He is a 22 year old full time student for 2020. He has earned income in excess of $14k. I'm uncertain if his parents co-signed his loans. It is my understanding that they do not claim him as a dependent. I will ask further questions of him and confirm.
You will be asked the earned income support question in the personal info interview. That question must be answered yes to get the refundable portion ($1000) of the AOC.
Based on his income the nonrefundable portion will be about $700 and reduce his tax to 0.