1098 T

[mhschraeder]

We have a dependent son age 22. He only attended college in spring 2025 and worked the rest of the year. How do we enter the info from 1098 T info. on both of our taxes? Box 1 is only $12,895 because remaining bill for spring 2025 was paid out of pocket in Dec 24 and not applied to 2025 1098 T. Box 5 includes pell grant of $3948 and the remainder is a scholarship from the school. So he will have taxable income of $4017. Can I use the pell grant towards room and board to help claim AOTC on our taxes? I read about the loophole of entering $4k in box 1 on ours and $0 in box 5 and entering $0 in his box 1 and the taxable excess income ($4017) plus $4k in box 5. I wasn't sure how the pell grant might affect that? Any help would be appreciated! Thank you!! 

[Hal_Al]

Yes, enter the 1098-T on your return with $4000 in box 1 and box 5 blank.

On his return, enter the 1098-T  with only $8895 in box 1 ($4000 less than the actual amount). Enter the full box 5 amount. He will have $8017 of taxable scholarship, rather than 4017. In his interview, he will be asked if any of the grant was used for room & board. Enter $8017 as the amount used for room and board.

If he had and book and computer expenses, the taxable amount can be reduced. 

A couple of caveats:

1. Graduation year is usually the 5th calendar year of schooling.  You are only eligible for the American Opportunity credit (AOTC) 4 times in your student's schooling.  If you already claimed the AOC four times in the past, you will only be eligible for the lesser Lifetime Learning Credit (LLC), which takes $10,000 of tuition (not $4000 like the AOTC). The credit is 20% of tuition paid.  Depending on you and your son's tax rates, you may need to re-think who claims it.  

2. If he finished school before May 1, 2025, he may not qualify as your dependent. To qualify as a "qualifying child" dependent, he must have been a full time student for parts of 5 calendar months. He can still be a "qualifying relative"/other dependent, if his income was less than $5200. 

See full dependent rules at: https://turbotax.intuit.com/tax-tools/tax-tips/Family/Rules-for-Claiming-a-Dependent-on-Your-Tax-Ret...

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $15,750 filing requirement (2025) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

Here's a post on the five main points on the  1098-T:

https://ttlc.intuit.com/community/college-education/discussion/re-what-do-i-do-with-form-1098t/01/37...

See #4 for the "loop hole" discussion

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit".  PUB 970 even has examples of how to do the “loop hole”.

[mhschraeder]

Awesome, thanks for your explanation. Makes sense. His room and board/meal plan is only $5667 (I forgot to include before) so do I only enter that when asked what was used towards it rather than the $8017? How does the $3948 pell grant affect the room and board expense? 

He finished school as semester early so this will be last time we can claim credit and school was out after May 1 so thankfully can still be a dependant. Thank you so much!

[Hal_Al]

Q. His room and board/meal plan is only $5667. Do I only enter that when asked what was used towards R&B,

rather than the $8017?

A. No.

 When asked if any of the scholarships was used for room and board, answer yes. Then enter the amount you want to be taxable, in the pop up box. R&B are not "qualified educational  expenses" for tax free scholarship.  So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.  This will put the taxable scholarship on line 8r of Schedule 1.

Q. How does the $3948 Pell grant affect the room and board expense? 

A. Not at all. The $3948 is already included in the box 5 amount on the 1098-t.  No distinction between Pell & school scholarship is needed.  Calling it room and board is just how you make it taxable. 

[mhschraeder]

Ok, thanks for explaining. I wasn't sure if pell grant money could be used tax free and allocated to room and board living expenses to help claim education credit in a "different" more helpful way? 

Another question...In 2024 we had a remaining balance due both semesters after scholarships/grants paid. Is the money we paid considered out of pocket and therefore not included in box 1 1098 QEE tuition paid? Can that be used to claim the AOTC and not have to add $4k to student's entry in box 1 taxes and our box 1?  

[Hal_Al]

The school includes all tuition paid in box 1 of the 1098-T, whether paid by loans, scholarships or out of pocket by the parents. 

 If you believe they made a mistake and did not include money you paid (that's unlikely), then yes, you'll need to make some manual adjustments and maybe manual calculations for the taxable amount of scholarship. 

[mhschraeder]

Yes I was confused. It is included in box 1, but still wondering if the actual amount we paid the school can be considered as out of pocket for claiming the AOTC because it wasnt awarded by school to cover only QEE? I'm probably confused but wanting to make sure I'm not missing something.

[Hal_Al]

Unless a scholarship is restricted to paying tuition (Pell grants are not restricted) you are free to allocate your qualified educational expenses (QEE)(tuition, fees, books and course materials including a computer) any way you want at tax time. You allocate your expenses to the tax credit or to the scholarships (to keep some of it tax free).  You don't have to isolate/allocate to actual out of pocket payments.  This assumes you don't  have a 529 plan distribution also needing allocated expenses. 

If you need help doing so, provide actual numbers. But, simply allocating $4000 QEE to the credit is all that is usually needed. 

[mhschraeder]

Thanks! 

1098 T

Box 1= 12,895

Box 5= 16,912

Entering on ours:

Box 1= $4k

Box 2= 0

Entering on dependent students:

Box 1= 8,895

Box 5= 16,912

So need to decide how much of the 8,017 to enter went toward room and board. Actual amount was $5,667. What are advantages to saying all $8,017 versus just entering the actual room and board? He has income from job in fall and trying to avoid too much tax liability to him after first $2700 of the $8017. Not like past years when just a student and wasn't working much so having taxable income didn't really affect him. Thanks again for help!!

[Hal_Al]

With $8895 in box 1 and $16,912 in box 5, TurboTax (TT) should automatically calculate $8017 as the taxable amount of the scholarship.  It should not even be necessary to enter room & board.  But, for some reason, that I have never figured out, it doesn't always do it right.

Answering the room & board (R&B) question usually ensures the correct answer (amount of taxable scholarship).   You are not really telling TT how much you spent on R&B. You are only telling TT how much of the scholarship is not being allocated to QEE.  

Q. What are advantages to saying all $8,017 versus just entering the actual room and board? 

A.  Getting the results you want: $8017 of the scholarship being taxable so that the parent are justified in claiming $4000 of tuition (QEE) for the AOTC.  What you enter does not affect anything else.