I claim my son as a dependent. He has a taxable scholarship. Do I claim that income on my return or does he? He has other income and files a return.

Forum|Forum|7 years ago
May 31, 2019
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My son is in college. I claim him as a dependent on my return. He received a 1098-T. He received more in scholarships (box 5) than what he had in eligible expenses, resulting in a taxable scholarship. That amount appears on the dependent student information worksheet but that amount did NOT flow through to Form 1040 Line 7. My son had other income also an files his own return. Which one of us claims the taxable scholarship amount on their return, the student or the parent?Thank you.

TurboTax Deluxe Online

Carl

Level 11

It depends on a number of factors. 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.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf

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 at least a half 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 provides less that 50% of the student's support (schollarships/grants received by the student do not count as the student providing their own support)

Then:

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 $6100, 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.

macuser_22

Alumni - Champ

For a qualifying child, it does not matter where the support comes from as long as the child him/herself does not provide more that 1/2 of their own support. A scholarship does not count as support that the child provides.

See IRS Pub 17 under qualifying child support test:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p17/ch03.html#en_US_2014_publink1000170907">https://www.irs.gov/publications/p17/ch03.html#en_US_2014_publink1000170907</a>

" A scholarship received by a child who is a student is not taken into account in determining whether the child provided more than half of his or her own support. "

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

woodlore

Level 2

I called the IRS with this question today for tax year 2015. Their answer was that if the scholarship reported on 1098-T is taxable, it needs to be reported on the return of the individual to whom the 1098-T is addressed. This is probably the student in most cases, as it always is for me.

Publication 970 for 2015, in two separate sections discussing coordination with Pell grants and other scholarships (pages 15 and 26), suggests "consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses." Also this: "Thus, including enough scholarship or fellowship grant in the student's income to report up to $4,000 in qualified education expenses for your American opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income." Similar language occurs in several parts of those sections. So this seems to match the answer from the IRS. These same sections also make it clear, by distinguishing between 'you/your' and 'the student', that it is possible for the parent to claim the credit even though the student reports the income.

Here, then, is how I handle my situation:
1) I claim my son as a dependent because he qualifies and I choose to do so.
2) He has a scholarship that is large enough to cover all tuition and other expenses that qualify for the education tax credits, but it is not large enough to cover anything else. So this *can* be a tax-free scholarship.
3) As it stands, my Adjusted Qualified Education Expenses on form 8863 are $0 for him, because I had to "reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance", and I therefor receive no tax credit for him.
4) Even though the scholarship *can* be tax-free, I choose to report $4000 of it as taxable income on my son's taxes. Publication 970 and the instructions for form 8863 both suggest this as an option to consider. Note that some scholarships may explicitly require that the funds be used only for tuition, books, and fees. If that is the case, this strategy is not an option.
5) I can now claim $4000 of qualified expenses on for 8863 for him, because I used $4000 of the scholarship for non-qualifying expenses (room and board), and my own $4000 for qualifying tuition expense.
6) I get $2500 education tax credits on my taxes.
7) My son now needs to pay taxes on the $4000 of scholarship income. In our situation, he has no other income, so his tax liability is $0. In fact, the $4000 of taxable scholarship income is not even enough to require him to file a return.

mkschoenle

Level 2

I have had this situation and I first put under my taxes to see the impact and then i put it under my daughters taxes. It was better to put on my daughters return because she was in a lower tax bracket.

KrisD15

Level 15

Yes, with the education credits, you do have options when it comes to allocating expenses, scholarships, and distributions.

As long as all the aid (distributions, scholarships) are accounted for, you can apply them the way that makes the most sense and results in the best tax situation, HOWEVER -

you can never claim as income a "restricted scholarship" nor VA assistance. Those two types of assistance must be allocated to the tuition or expense it was awarded for.

@mkschoenle

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