How to Input Forms 1098T & 1099Q into TurboTax Properly in Order to Claim Education Tax Credits

[Luna_Tax]

I apologize in advance for the length of my post; I wanted to be as clear and detailed as possible.  Our son started college in Fall 2022 (full-time undergrad) and we are claiming him as our dependent in our 2022 Form 1040.  He had a small income for 2022 but has to file a return since he owes self-employment taxes.

His 2022 Form 1099Q shows the following: Box 1 (gross distribution) $2,100; Box 2 (earnings) $600 and Box3 (basis) $1,500. His 2022 Form 1098T shows the following: Box 1 (payments received for qualified tuition) $50k and Box 5 (scholarships) $35k.  Our Box 1 is made up of payments received by the college from multiple sources such as loans, our cash payments, outside scholarships, grants, Finaid and 529 payments.

Question 1-It appears to me that Box 1 of Form 1098T includes the amounts for the Fall 2022 room and board as well.  My reasoning is that the school received FULL payment during 2022 for the Fall semester and as such everything including room and board balances (which was about $8k), were paid in full.  We entered Boxes 1 and 5 of Form 1098T in Turbo Tax (“TT”).  How do we enter our information in TT to correctly reflect that the $50k in Box 1 also includes $8k in room and board? There is a section in the input form for 1098T that allows you to enter a different tuition amount, if what is reported in Form 1098T is not correct. Do I enter $42k in this section ($50k per Box 1 less $8k for room and board)? It seems per TT guidelines that we need to enter exactly what is reported in Boxes 1 and 5 of Form 1098T. So I input the $42k in the section under Box 1 of input forms. But when I looked at the “Tuition Statement”, under reconciliation of Box 1, line A “Enter Box 1 amount not paid during 2022” it shows $8k, while line B “Enter Box 1 amount actually paid during 2022” shows $42k. However, this does not seem correct to me since the entire $50k was actually paid during 2022, not just $42k. It is not correct that $8k is classified as NOT paid during 2022. I am confused as what needs to be entered to reflect our facts.

A few input screens later, TT asks for costs of books, materials and room and board. Do I need to enter $8k relating to room and board here too? Then a few input screens after this, TT asks if we “used scholarship, grant to pay for room and board”.  How do we answer here? I have said “No” since our Box 5 (scholarships) was much less than Box 1.

Question 2-We paid about $7k towards the Spring 2023 tuition (that was due Dec 1, 2022); this amount is also included in the $50k in Box 1 of Form 1098T. Box 7 is also checked that payments for academic periods Jan-March 2023 are included in Box 1. However, the Spring scholarships, finaid and 529 payment are NOT included in Box 5 of Form 1098T in 2022 since they were not received/posted by school until Jan 2023. Do I need to enter any of the Spring 2023 scholarships, Finaid and 529 payments in the 2022 TT input forms? If so, how and where should they be entered? To be clear, the scholarships received in January 2023 are only for the Spring 2023 semester charges and not a prior period.

I also saw in TT guidelines in the input form that “… your education expenses for each quarter or semester must be reduced by any tax-free assistance received for that same academic period. So, for example, if you paid for Spring and Fall semesters in 2022, you would enter the scholarship income that was meant to be used for those semesters in 2022 even if it was not received until 2023”.  So does this guidance mean that in your 2022 tax return, you only will include those scholarships you receive in 2023 that are for a PRIOR semester such as Spring 2022, Summer 2022 or Fall 2022?

Question 3-I had read on the TT community discussions that Form 1098T is just an informational form and we can enter numbers per our own records instead. However, Form 1098T states that this form is being provided to the IRS. So why would you enter different numbers in TT that won’t match the tax document the IRS receives from the college? Wouldn’t the IRS look for a reconciliation between what is in the return vs. Form 1098T? I know books and school supplies are NOT reflected on Form 1098T so they need to be entered separately in TT as qualified education expenses.

Question 4-I have a question about part VI “Education Expenses”, line 17 “Used for Credit” in the “Student Information Worksheet”.  What does this line item exactly represent and what number is supposed to be input there?  Initially TT had entered $0 in our return and $10k in our son’s 1040.  Since I had NOT input these numbers and TT had never asked me about them in the interview section, I tried to delete them (thinking they were wrong) but they would automatically re-populate with previous numbers.  I read on the TT community that you actually have to input zero in this field in order to stop it from going back to the previous numbers, which is what I did in our both returns.  On the other hand, while going through interview steps in my son’s return, TT suggested that the parents should input $4k (since AOC applies to first $4k of qualified expenses) in the “Used for Credit” box in the worksheet if they are claiming AOC, which is what I did in our return.  I have tried 0, $4k and $10k in our return in this field and it seems to me regardless of which number is used, the “Student Info Worksheet” does NOT change! “Education Expenses Used for Tax Credit” input form also says “if the person who claimed you as a dependent also claimed the AOC, you should use $4,000”.

As I mentioned above, TT suggested in my son’s return that the parents should use $4k in this field which is what I did. However, when I went back through our education section input steps again, I got a message from TT that the $4k was no longer needed so TT automatically changed it to 0 in our 1040! I am confused as to how TT comes up with a number for this field and what its purpose is.  Also, are the “Used for Credit” amounts supposed to be the same number on both the parents and student returns, so in our case that TT made our “Used for Credit” zero, should I change our son’s to zero as well (it’s currently at $4k)?

Thank you for taking the time to read through this lengthy post and providing much needed guidance.

[Critter-3]

Ok... bottom line is you can simply enter $4000 for the tuition on the parent's return ONLY since they will claim the dependent.  

[Hal_Al]

As simplistic as it is, @Critter-3's answer is correct. The parents enter the 1098-T with $4000 in box 1 and nothing else.  Theoretically, TurboTax (TT) can handle the complications you describe, But, as you have already discovered it gets messy real fast.  So, the best way to do it is just enter the 1098-T with $4000 in box 1. You only need $4000 of expenses to claim the maximum tuition credit (AOC).

Neither the parent nor the student enters the 1099-Q. The student does not enter the 1098-T, or any other educational info on his return (other than that he is a full time student in the personal info section). Only if his scholarships exceeded his adjusted qualified educational expenses (AQEE) would he need to enter anything. Then, some of the scholarship would be taxable.

What you read is correct. Both the 1098-T and 1099-Q are only informational documents. The numbers on them are not required to be entered onto your tax return. If you claim the tuition credit, you do need to report that you got a 1098-T .

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T. In the 1098-T screen, click on the link "What if this is not what I paid the school" underneath box 1. You will then be able to enter the actual amounts paid. Or if you find it easier (and you will), just change the numbers in boxes 1& 5 to what your records and calculations show.  You only need $4000 of expenses to claim the maximum tuition credit. The 1098-T that you enter in TT is not sent to the IRS.  The IRS does not match numbers.

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms.  You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit (and you have already done that).

References:

1. On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."
2.  IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.

Room and board (R&B)are qualified expenses for a 529 distribution. R&B are not qualified expenses for the tuition credit (AOC). 

You may have to delete all the educational info and start over.  Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click delete next to the student's name.  You'll then get the "Your Education Expenses Summary" screen again.  Click the "Add a student" button.

[Luna_Tax]

Thank you @Hal_Al for your detail response. I appreciate you taking the time to answer. I will read it in more detail and run the numbers through TT. I will reach out if I have more questions. 

[Luna_Tax]

Thanks @Critter-3