Form 1098T Tax implications

[oomphalo]

I am a retired parent with a child that is in college.  I have low income (~ $6000) from teaching singing lessons.  My child has a 1098T that shows $14,500 in box 1. $9900 in Box 4 and $41,000 in Box 5. The Box  1 amount  reflects the amount paid for  tuition.  Box 5 reflects the TOTAL amount of money provided.  I believe that the $26,500 ($41,000-$14,500) that was used for room and board is taxable income for my child, correct? Because the $26,500 is much greater than my income (~$6000) I fear that I lose the right to claim my child as a dependent nor can I claim Head of Household.  Am I correct?  Do I qualify for EIC? 

What do I do with the Box 4 data? 

Does my child have to file a tax return showing $26,500 as income?  

Even with the Standard Deduction for Single ($14, 600) my child would show $$7900 ($26, 500-$14,600) of taxable income and owe the IRS money.  Is this correct? I am shocked my child will have a tax liability.

[KrisD15]

Yes, from what you provide, the student will need to file and most probably have a tax liability, HOWEVER scholarship income is not used for determining if he supplied half his own support, so even if he is away at school, if he intends to return home, you would reported that he lived at home all year and you could still claim him as your dependent. 

You'll need to ask the school what Box 4 is reporting, it could be a class that was dropped and refunded. 

[Hal_Al]

Q. Because the $26,500 is much greater than my income (~$6000) I fear that I lose the right to claim my child as a dependent nor can I claim Head of Household.  Am I correct? 

A. No. Scholarships are ignored in the dependent support calculation. "They just don't count".

He is still your dependent for all tax benefits, including HoH and EIC.

Q.  I believe that the $26,500 ($41,000-$14,500) that was used for room and board is taxable income for my child, correct? 

A. Yes.

Q. Does my child have to file a tax return showing $26,500 as income?  

A. Yes

Q. What do I do with the Box 4 data?

A. You are expected to know what that is for.  If you didn't claim a tuition credit on your 2023 return, it's unlikely to affect you. 

From the form 1098-T instructions:

Box 4. Shows any adjustment made by an eligible educational institution for a prior
year for qualified tuition and related expenses that were reported on a prior year Form
1098-T. This amount may reduce any allowable education credit that you claimed for
the prior year (may result in an increase in tax liability for the year of the refund). See
“recapture” in the index to Pub. 970 to report a reduction in your education credit or
tuition and fees deduction

[AmyC]

1. Yes, room and board is taxable income to the student.

2. See  IRS Worksheet for Determining Support. The IRS has a quick quiz,  Dependent to ensure you qualify to claim your student.

3. A qualifying child under 24 in school can qualify you for EIC. 

• The Earned Income Tax Credit Assistant - a quick quiz, determines if you’re eligible for the earned income credit (EIC) 
•  What is the Earned Income Tax Credit? - TurboTax Community 

4. The box 4 data is an adjustment to last year's tuition paid. You should look at last year's return and see if you claimed any education credit and if reducing the tuition by box 4 will affect your return. If not, do nothing. If it would affect your return, amend it. See How do I amend my federal tax return for a prior year?

5. Your child will need to file a tax return for income. If you are not able to claim your child, they can claim the education credit against their taxable income. See another post of mine with a similar situation here.

[oomphalo]

Thank you for this detailed response and the links you provided.  I will make sure to read them all. Based on the multiple questions regarding the 1098T it appears that it is a very confusing topic and it makes me wonder if even the IRS employees can figure it out!

[Hal_Al]

@AmyC  said " If you are not able to claim your child, they can claim the education credit against their taxable income".

In order to that he would have to declare a little more of his scholarship taxable (quick estimate: around $1000).

Alternatively, you can claim the refundable portion of the American Opportunity Credit (AOC), if he is you dependent and declares about $2000 more scholarship taxable (he pays about $240 more tax but you get $800). 

Another thing to consider; the AOTC can only be claimed 4 times. You don't want to use one of those times for $800 if it will be worth $2500 later.  That's an "iffy" thing. 

[oomphalo]

Thank you for this feedback!