Non-taxable scholarship reported on W2

[csc12]

A scholarship from my summer employer was included in the W-2 and taxes withheld. The scholarship was used to pay for a portion of my tuition as such, the IRS states that the scholarship is not taxable. How do I remove the scholarship from my income in Turbotax?  I tried to update Schedule 1, Part II, line z (Other adjustments), through forms but now getting errors that "Other Adjustments" line is no longer used to report adjustments.

Note that this scholarship is not reported on Box 5 of the 1098-T.

[Vanessa A]

If your employer included it in box 1 of your W-2, you have three options.  

1. You can leave it as taxable income and claim an education credit using the amount that the employer paid since you are being taxed on it.

2. You can ask your employer for a corrected W-2

3. You can make an adjustment to your income by backing it out by entering it as a negative number by taking the following steps:

1. Income
2. Less Common Income
3. Miscellaneous Income
4. Other Reportable Income
5. Answer Yes to Any Other Taxable Income
6. Enter the description such non-taxable Scholarship or employer provided assistance income erroneously included in box 1 of W-2
7. Enter the amount as a negative number. 

NOTE:  If your employer paid more than $5,250 as employer provided assistance, the amount over that is considered taxable as your employer can only contribute up to $5,250.  If this was a TRUE scholarship, then the limit would not apply.  A scholarship is free money, that you were not required to work for. If it was tied to employment and you needed to work for it, it would be considered taxable income. 

If you remove this from income, you cannot include in your education expenses for an education credit the amount you are removing from income. You will need to enter YES to the employer sponsored assistance question in the 1098-T section and enter the amount you are removing from income. 

Also, in order to remove it from income, it would have had to be used for qualified education expenses, not room and board.  

[csc12]

Thanks for the info, very helpful.  I will go with option 3.  This is a TRUE scholarship (not employer assistance) as I was not required to work for it. I had to apply for and was awarded the scholarship. Only a handful of us, who were part of this summer program, were awarded the scholarship, in addition to our salary.

Social Security and Medicare taxes were also taken out of the scholarship.  Is there a way to get those taxes refunded?

[RobertB4444]

Yes.  Your employer will have to correct the W2 to remove the scholarship from taxable income and return any amounts to you that were taken out in error.