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.
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.
are grants considered support from others on the irs worksheet for determining support dependant?
Re-read the above, as there was a mis-wording which has been corrected now. There is no requirement for the parents to provide more than 50% of the student's support. The requirement is that the student provide LESS than 50% of their OWN support. Also, scholarships/grants DO NOT COUNT as the student providing their own support.
thank you for that. but is it considered support from others? so if between myself and other sources had paid more than 50% then he wouldnt have paid over 50%. i thought i read somewhere that scholarships count as support from others. so its not just between him and myself. other people and institution may have contributed? thank you again.
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. "
Also, it doesn't matter if grandma provided 90% of his support, the rest came from scholarships and one percent came from the parents. If the student is your qualifying child dependent, then the parents claim the student as a dependent, and the parents also get to claim all the educational expenses. Remember, there is nothing in the IRS Pub 970 that says the parent has to provide more than 50% of the student's support. The pub says that the student provides *less* than 50% of their *own* support, and it that scholarships and grants do not count as the student providing their own support.
You may wish to use the IRS tool at <a rel="nofollow" target="_blank" href="https://www.irs.gov/uac/Am-I-Eligible-to-Claim-an-Education-Credit%3F">https://www.irs.gov/uac/Am-I-Eligible-to-Claim-an-Education-Credit%3F</a> to see just what credits you qualify to claim. The TT program figures all this automatically for you. But using the tool for piece of mind doesn't hurt.
So, if I understand correctly, if the student doesn't have any earned income and the taxable scholaarship amount is less than $6100, then niether the dependant student nor the parent need to report the sholarship money?
I believe several aspects of this answer are wrong. See my answer below and read Publication 970. In some (perhaps even most) cases, the right way to handle this is for the student to report the taxable scholarship income, while the parent files form 8863 and claims the credit. Also, a different limit applies to taxable scholarships, not $6100 or $6300, as they are unearned income.
Edited - Per following discussion, it seems taxable scholarships are earned income for reporting requirements of a dependent child, and unearned income in some other situations.
Taxable Scholarships and fellowships are reported on line 7 of the students own tax return with "SCH" next to it, and is earned income, the same as wages, for the filing requirements.
Tuition and other educational credits cannot be claimed by a dependent, but they can be by the taxpayer claiming the dependent if they paid them and otherwise qualify.
From 2015 Publication 17 page 208:
Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, taxable scholarship and fellowship grants not reported on Form W-2, the taxable part of social security and pension payments, and certain distributions from trusts. Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages).
Same thing in the instructions for form 8615:
For Form 8615, “unearned income” includes all taxable income other than earned income as defined later. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.
Now found this contradictory statement in the popup help from the Interactive Tax Assistant when going through the Who Must File scenario:
"Earned income also includes any part of a scholarship or fellowship grant that is considered gross income."
though it does reference pub 17 for more details, and that pub seems to contradict.
The earned income test for supporting yourself for form 8615 is a different test and scholarship income is not part of that test. The dependent filing requirements are different which is what the answer was about.
Pub 501 - filing requirements for dependents.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p501/ar02.html#en_US_2015_publink1000220708">https://www.irs.gov/publications/p501/ar02.html#en_US_2015_publink1000220708</a>
Earned income. Earned income includes salaries, wages, professional fees, and other amounts received as pay for work you actually perform. Earned income (only for purposes of filing requirements and the standard deduction) also includes any part of a taxable scholarship. See chapter 1 of Pub. 970, Tax Benefits for Education, for more information on taxable and nontaxable scholarships.
You cannot apply the definitions in one section of the tax code to a different section, that is one thing that makes taxes confusing. For example, the term MAGI (Modified Adjusted Gross Income) is used in about 6 different places in the tax code, each defined differently (your MAGI for health care is much different than for IRA deductions).
Fair enough, and thanks for the clarification. The part in pub 501 is pretty clear. I will edit my answer below and remove the part about filing requirements. My comments about who reports the income will remain, for now at least.
Just to double check. My daughter(19) has scholarships that exceed the qualified education expenses, and has a 1098-T and is more than $6300. Can she file her own taxes (take Standard deduction) and I can put her in my taxes as a dependent and I don't need to deal with any of her income ?
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.
Are the parents allowed to claim child as a dependent if they want the child to file their own return?
I read it as parents can either claim dependent and get the benefits/credits of that BUT have to include excess scholarship as taxable income
or
Parents DO NOT claim as dependent. Child has to select "can be claimed as dependent" on own return. And then file if necessary (earned income over the threshold)
Let me know!
@joshambuehl wrote:
Are the parents allowed to claim child as a dependent if they want the child to file their own return?
While nobody can be compelled to claim a dependent, a dependent cannot claim them self if they can be claimed by another tax payer - the tax law does not allow that.
That is why there are two questions in the interview - *can* you be claimed as a dependent by another taxpayer, and *were* you (or will you) actually be claimed by that taxpayer?
In both cases the dependent will not get the full deduction. if the answer is "no", the dependent is then allowed to claim certain educational credits that cannot be claimed by a dependent if they are actually claimed.
A dependent is required to check that they *can* be a dependent whether they are actually claimed or not.
If the student is required to file a tax return, then the student is required to file a tax return. Period. End of that story.
If the parents *QUALIFY* to claim the student as a dependent on the parents' tax return, then it flat out *does* *not* *matter* if the parents actually claim that student or not. The student doesn't have a choice and *must* select the option for "I can be claimed on someone else's tax return".
Please take note that for the student, the option is "I ****CAN*** be claimed..." Not, "I **WILL** be claimed"
The parents have the choice to claim the student or not. If the parents *QUALIFY* to claim the student, then the student does not have any choice on what the student is required to indicate on the student's tax return.
Here's some things that students and parents alike get confused on to, when trying to figure out the dependent stuff.
- There is no requirement for the parents to provide the student any support. Not One Single Penny. The support requirement is on the student, and *ONLY* the student. It reads:
If the student did not provide more than 50% of the student's own support, then the parents qualify to claim the student as a dependent on the parent's tax return. Scholarships, grants, 529 funds, gifts, etc. do not count for the student providing their own support"
- Take note of the word *QUALIFY*. In no way does it insinuate an absolute requirement to claim the child.
- There is no requirement for the parents to provide a single penny of support to the student.
- The student's earnings/income does not matter. The student could earn a million dollars and yet the parents' still qualify to claim them.
- There are only two possible ways the student can provide more than half of their own support.
1) The student had a job or was self-employed during the same tax year and earned sufficient monies to have provided more than half of their support.
2) The student was the ***PRIMARY*** borrower on a *qualified* student loan and sufficient funds were distributed to the student during the year to justify the student providing more than half of there support.
Now even with that, it's perfectly possible for the student to earn $500,000 in a tax year, yet still be unable to have provided more than half of their own support. So student earned/borrowed income alone won't do it.
If the student received $150,000 (my numbers are exaggerated to make the point here) in scholarships, grants, 529 distributions and other third party sources, that would mean the student would have to have more than $150,000 of income ithey earned in the tax year *AND* that it cost them more than $300,000 to support themselves for the tax year.
Now there is no way on this green earth that you will ever convince the IRS that it cost more than $300,000 to support an *undergraduate* student for a year, I don't care what college you go to including Yale, BYU, Harvard, etc. Support cost have to be "reasonable" and $300,000 which includes the tuition and other education cost is flat out *not* reasonable any way you look at it.
Hello @Carl , thank you for your indepth explanation. I do have some follow-up questions. You specifically state if the student is "enrolled in an undergraduate program"; do the same rules apply if it is a graduate program?
I have reread your column at least five times and will read it again. But if you would clarify the following:
1) I have established I AM eligible to claim my student as a dependent based on all the rules.
2) He will receive more than $6100 in taxable awards.
I am unclear if it is an option who claims the excess amount.
Is this correct?
1) I CAN if I want the tax breaks
2) He CAN but would need to pay the tax on the amount and he gets the tax breaks?
OR since I am claiming him, I HAVE to include the taxable amount on my return?
Please feel free to redirect me to the IRS if I am making this far too complicated.
Thank you!
The child would have to claim the scholarship income in excess of qualifying education expenses on his or her tax return.
And as a practical matter, since their is excess scholarship income, the parent would not be allowed an education credit, so there would be no reason to enter the education information on the parent's return.
If the child is eligible to be claimed as a dependent of the parent, then the parent is the only one that can claim him, the child must indicate in TurboTax that he is a dependent of someone else.
do the same rules apply if it is a graduate program?
No. That's why the program asks you if the dependent as completed 4 years of college as of Jan 1 of the tax year. If you answer the question yes, then different rules apply and the program knows what those rules are.
I am unclear if it is an option who claims the excess amount.
In a situation where scholarships and grants exceed the qualified education expenses, then it's the student who will report all of the education stuff on the student's return, and the student will pay taxes on excess that was not used for qualified education expenses. it does not change the fact that parents will still claim the student as their dependent, if they qualify to claim the student as their dependent. It does not change the fact that the student must select the option for "I can be claimed on someone else's tax return" if the parents qualify to claim the student - even if the parents do not claim the student.
Please feel free to redirect me to the IRS if I am making this far too complicated.
No, you're not making things complicated at all. The IRS does that very well all on their own. Just go back and read my very first response in this thread. I clearly reference IRS Publication 970 and then I do my best to put that document into plain english, so that all of us mere mortals can comprehend it. 🙂
You want complicated? Just read IRS Publication 970. Then take two cyanide tablets and call me in the morning. 🙂