Grant/scholarship increasing my taxes due

[marinija13]

Hi there, I'm putting together my tax return and it appears that my scholarship/grant is increasing my tax due. I am not sure why because that's the grant money that was paid by the institution for the tuition and fees. Is that considered income or am I doing something wrong the way I file? Thanks!

[Vanessa A · Accepted solution]

Since your tuition was higher than your scholarships and grants, it should not increase your taxes due or taxable income. 

When you walk through the questions AFTER you entered the 1098-T, did you enter the scholarship again and say it was used for something other than your qualified education expenses.?  If so, go back through and double check your answers.

Did you qualify for an education credit?  if so, it is possible that when you entered the scholarship, your credit was based on $2,000 instead of $5,000 which would lower your education credit which could potentially increase your tax due. For example, the American Opportunity Tax Credit is worth up to $2,500.  The first $2,000 is fully deductible dollar for dollar, and the next $2,000 is 25% deductible.  So if your eligible tuition went from $5,000 down to $2,000 your credit would go from $2,500 down to $2,000 increasing your tax due by $500 because of the loss of the credit to offset your taxes due. 

While the Lifetime Learning Credit is worth 20% of your education costs up to $10,000 for a maximum of $2,000.  If your education costs dropped by $3,000 this would drop your credit by $600 which could increase your tax due by $600 as you would lose that offset to your taxes due. 

[marinija13]

Thank you so much. This was definitely helpful because it didn't make sense to me why would it do so. Turns out I didn't updated 1098-T information from previous year. Thank you again for explaining the different tax credits.

[marinija13]

Hi, one more question. So, in the past year, my employer reported my tuition reimbursement as income. Let's say total tuition amount paid that year was $20 000. Employee assistance program lowered that to about $15 000, so the amount added to my W2 income was $15 000. 
Now, this year let's say the total tuition was $10 000 and that was paid by the scholarship/grant money by the institution. The employer did not report anything as income nor they reimbursed anything. 1098-T shows total amount in box 1 of let's say $15 000 but the total amount paid was $10 000. I called them and clarified that the $5000 was billed in Dec 2023 but it counts toward Spring 2024 so it's being reported for 2024 tax year. However that same $5000 from last year was taken into account last year when my employer reimbursed me and it was added to my taxable income last year. 
What should I do with that same $5000 this year? Do I just change the amount paid on my 1098-T to $10 000 and don't claim any credits as I didn't pay for anything out of the pocket? Thank you. 

[AmyC]

You paid tax on the income on your 2023 tax return. This means it was taxable dollars that paid the tuition listed for 2024. You will enter the $15,000 of tuition and the $10,000 of reimbursement. You may be eligible to claim a credit.

Reference:  What You Need to Know about AOTC and LLC

[marinija13]

Thank you for your replay. I am trying to understand the answer better. Are you saying that because I already paid taxes on those $5000 in 2023, I can now claim credit for 2024? Also, I already took educational credit last year when those $5000 were included in my income. It’s tricky for me because employer counted the payments made during 2023, but school actually counted what was for each semester. 
In 2024 I have not paid anything out of the pocket. Everything was paid by the grant. But because these $5000 are now reported on 2024 1098-T I am eligible for educational credit? I do have a proof of payment, but I am just concerned not to “double dip”. 

[Hal_Al · Accepted solution]

Q.  Do I just change the amount paid on my 1098-T to $10 000 and don't claim any credits as I didn't pay for anything out of the pocket? 

A. Yes. You claim the tuition credit,  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.  Or better yet, just don't enter the 1098-T (or delete it).*

"In 2023, my employer reported my tuition reimbursement as income. Let's say total tuition amount paid that year was $20 000. Employee assistance program lowered that to about $15 000, so the amount added to my W2 income was $15 000. "

Employers are allowed to reimburse employees, tax free, up to $5250/yr.  Any amount above that must be reported as income on your W-2.  So it sounds like you were reimbursed the entire $20K in 2023 ($5250 tax free and $14,750+/- taxable).  You may claim the tuition credit, in 2023, because $15K+/- of it was paid with your taxed money. 

The $20K was totally accounted for in 2023.  You ignore the extra $5000 on the 2024 1098-T.  This is a common error schools make because of the year end timing.

*The 1098-T is only any informational document. The numbers on it are not required to be entered onto your tax return, nor is the for required to be reported. Only,  if you claim the tuition credit, you do need to report that you got one. You claim the tuition credit, or report scholarship income, based on your own financial records. Unfortunately that sometimes means working around the 1098-T and the TurboTax interview.

But, this may be real simple. The entire $10K was covered by scholarship, so there is nothing to report. Just don't enter the 1098-T for 2024.