Scholarship not allocable to 2019?

[dyons]

I would like to understand if I am doing something correctly. I’ll describe the situation using a simplified example. The issue is that my child’s school provided a scholarship for the 2018-2019 academic year, divided equally between both semesters but chose to include one half of the scholarship in the 2018 1098-T and the other half in the 2019 1098-T. As I paid for both semesters in 2018, and took the AOTC in the 2018 tax year, I am now left with a 1098-T for 2019 without a corresponding expense.

Thus, in my simplified example:

Qualified Education Expenses for fall 2018 and spring 2019: $50,000

Scholarship (for the academic year): $30, 000

Amount billed and paid in 2018: $20,000

1098-T for 2018 shows: Box 1: 20,000; Box 5: 15,000

1098-T for 2019 shows: Box 1: 0; Box 5: 15,000

My child transferred to a state school in fall 2019 without any scholarship, and we have a 1098-T from that school also. However, the 1098-T from the first school discussed above with a $15,000 scholarship messes up the AOTC calculation and gives us no AOTC for 2019. In fact, my child will have an added income arising from that.

I redid my 2018 taxes including the 30,000 scholarship and find that I am still eligible for the AOTC.  However, my child has some extra income ~$1500 for 2018. (The child did not file in 2018 as there was no income.)

Would I be OK if I included this extra income from 2018 in the child's 2019 tax filing? I would like to know if this is possible and a proper way to avail of the 2019 AOTC while staying in compliance with any tax rules.

Thanks in advance.

[KathrynG3]

No. Unfortunately, you cannot include expenses paid in the prior year even when it was for the 2019 semester.  

See this article for more information Can I include education expenses on my 2019 return that I paid 2018 or earlier?

No, each year stands alone. The extra income for your child in 2018 may need to be reported in 2018. How do I prepare a prior-year tax return? Even with $1,500 of additional income, there may be no tax requirement in 2018 for your child. 

Click the links for additional information:

Reporting a portion of scholarship as income by TurboTax Employee Tax Expert, DanielV01

Lowdown on Education Tax Breaks

2019 IRS Publication 970 Tax Benefits for Education

@dyons

[dyons]

Hello Kathryn:

Thanks for your prompt reply. However, I am not including education expenses for 2018 in my 2019 return. Quite the opposite. I am including taxable income that would have been required to be paid in 2018 had I included the full scholarship amount in 2018. I was asking if I could include that as income in 2019.

I was guided by the following text provided by TT as a part of the following interview question :

"Did [[name here]]'s Aid Include Amounts Not Awarded for 2019 expenses? Schools sometimes will not report education expenses and the corresponding scholarship income on the same year's Form 1098-T. Learn more."

The explanatory text from "Learn More" above reads:

"Scholarship income must reduce qualified education expenses for each period of study that assistance is allocable to. However, sometimes scholarship income is not received at the same time education expenses were paid. This can cause your scholarship income to be overstated in one year and then understated in another year. If you received scholarships or grants in 2019 for expenses reported in a year other than the current year, enter an amount here to reduce your scholarship income amount. You will need to include that same amount as scholarship income in the tax year in which the education expenses are actually reported.

For example, in 2018 you received a 1098-T with $4,000 for your fall 2018 expenses which you reported on your 2018 tax return. In 2019 you received a 1098-T that included tuition expenses of $6,000 and $10,000 of scholarship income. $4,000 of the scholarship was actually for your 2018 expenses. You will enter $4,000 here to reduce your scholarship income to $6,000 for 2019. You may also need to recapture any education credit or deduction taken in 2018 that would have been disallowed in 2018 due to the additional $4,000 of scholarship income allocable to 2018 education expenses."

I was trying to follow the example above. If you look at my situation, I paid for the fall 2018 and spring 2019 expenses less full amount of scholarship in 2018. The school chose to break up the scholarship amount into one half in 2018 and another half in 2019. But the 2019 scholarship was fully used to pay for expenses incurred in 2018. Thus, I believe I am correct in choosing the option to say that the 15000 scholarship is not for expenses incurred in 2019. That's because there is NO expenses incurred in 2019 - it was all paid for in 2018!

In view of the above information, please can you look over my situation again and verify if I am following the example provided by TT correctly.

Thanks again.

[MarilynG1]

Since all Education Expenses and Related Scholarships were handled in your 2018 return, you are not required to enter the 1098-T from your son's first school in your tax return.

[dyons]

Thanks, Marilyn.

But is it OK to ignore a 1098-T completely? Is that information not also shared with the IRS, and will they not catch the discrepancy? Or is it that they will indeed catch it, but I then have the appropriate explanation at hand to answer them.

Thanks.

[MarilynG1]

Yes, it is ok to ignore the 1098-T if you are not claiming an Education Credit.

The IRS is aware that many 1098-Ts are incorrect, and have cross-year reporting of Tuition and Scholarship amounts.

Since you are not claiming a credit in 2019, any explanation you are asked for will be for 2018, where you did properly report the total Tuition and Scholarship amounts.

Click this link for more info on the 1098-T. 

[dyons]

Hi Marilyn:

But, as you will see from the last part of my original post, I am claiming (or trying to claim) the AOTC for 2019 also. My child continues to go to another college and has received a 1098-T from that new college.

This additional $15000 scholarship for 2019 from the first college for which the compensating expense was paid in 2018 is what's causing the problem.

That's why I was wondering if I should follow the example from the TT interview (quoted above) to get the AOTC for 2019 and add some taxable income for my child's federal tax for 2019.

PLEASE, if time permits, can you read my original post again.

Thanks very much.

[MarilynG1]

The reality is that you had Education Expenses for the first school that exceeded Scholarships (50K Tuition, 30K Scholarship, is that correct?) ,  so you don't have taxable excess scholarship to report on you or your son's return.  

However, reporting this in TurboTax so that you don't have Taxable Scholarship using the 1098-Ts won't work.  

Since you didn't pay any Tuition to the school in 2019, the 1098-T is numerically correct, but doesn't reflect the actual situation. 

The only workaround would be to enter the 1098-T and click the link under Box 1 'what if this is not what i paid to the school' and enter 30K for Tuition to offset the 15K Scholarship, but this is not correct, either. 

There's no way to get this to easily show in TurboTax, that's why it is better to just not enter the 1098-T. 

If you qualify for an Education Credit in 2019, it would based off his Education Expenses/Scholarships from the second school.