Scholarships not listed on 1098-T

[anonymouse1]

I just found out that scholarships my freshman received and declared, but had deposited to her bank account instead of sending checks to the college, will not be on 1098-T.  The university only puts scholarships that were sent to them in Box 5.  I did transfer the scholarship money from my daughter's bank account to my checking account and used them to pay part of the tuition and fees (they didn't cover everything).  Where do I declare them (and on her 1040 or mine?) so that they won't be included in her taxable income.  I'm assuming that she will get 1099-Qs for the larger ones at least.

[Anonymous_]

@Hal_Al 

[Hal_Al · Accepted solution]

I assume she is your dependent.

Q.  Where do I declare them (and on her 1040 or mine?)

A.  You enter her 1098-T, in TurboTax (TT), on your return.  After entering the 1098-T you will get a screen asking if there were any additional scholarships not shown on the 1098-T.  Enter there and follow the interview.

Q. How do I enter so  that they won't be included in her taxable income. 

A.  Enter on your return, not hers.  But she MAY still have to enter some of it on her return. Scholarships that pay for qualified educational expenses (QEE - tuition, fees, books and other course materials) is tax free.  Scholarship amounts that exceed QEE is taxable income, on the student’s tax return.

If box 5 of the 1098-T (plus the other scholarship) exceeds box 1, TurboTax (TT) will treat the difference as taxable income, unless you enter additional QEE at books and other expenses.

If you are entering the 1098-T, on your return, TT will advise  you that your student has taxable scholarship income.  It will not (and should not) enter the taxable scholarship on your tax return.

if your dependent had no other income and her grants do not exceed her QEE by more than $12,950, she does not need to file. 

Q. I'm assuming that she will get 1099-Qs for the larger ones at least? 

A. I assume you mean 1098-T, not 1099-Q.  Yes, her scholarships should be reported on the 1098-T (box 5). 

A 1099-Q is for a distribution from a 529/Qualified Tuition Plan.  If you (or she) got such a distribution, see below.

Q.  If my student had scholarships, can I still claim a tuition credit?

A.  Yes, probbably.  See "Loop Hole" below.

_________________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

You have $1120 of taxable income  

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip!  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings. 

________________________________________________________________________________________

There is a tax “loop hole” available.

The student reports all his scholarship, up to the amount needed to claim the American Opportunity Credit (AOC), as income on his return. That way, the parents  (or himself, if he is not a dependent) can claim the tuition credit on their return. They can do this because that much tuition was no longer paid by "tax free" scholarship.  You cannot do this if the school’s billing statement specifically shows the scholarships being applied to tuition or if the conditions of the grant are that it be used to pay for qualified expenses.

Using an example: Student has $10,000 in box 5 of the 1098-T and $8000 in box 1. At first glance he/she has $2000 of taxable income and nobody can claim the American opportunity credit. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.

Books and computers are also qualifying expenses for the AOC. So, extending the example, the student had another $1000 in expenses for those course materials, paid out of pocket, she would only need to report $5000 of taxable scholarship income, instead of $6000.

[anonymouse1]

No, I meant 1099-Q (or I suppose some sort of 1099) from the larger donors at least.  Unless I pay the spring tuition in 2022 (since 2 scholarship checks that came in late were turned over to the school and applied to spring tuition), Box 5 will be zero.  If I do pay the spring tuition (just in case she gets 1099s for the scholarships, I want the year to match up with the expenses they're being used for), Box 5 will have less than $3000 in it, and the tuition, fees (and I assume digital textbooks the school put right on the fall bill) I will have paid in 2022 will be almost $14k (where are federal student loans accounted for?  I know they count as our money for AOTC, so I assume they won't be in Box 5, but will they be deducted from Box 1?).  So there wouldn't be any taxable part, even if they DID include the scholarship checks that she cashed but told them about in Box 5.

I looked at last year's return (didn't save the changes), and only saw questions about the 1098-T boxes in the interview, nowhere to enter scholarships that weren't on the form.  The AOTC part asks about expenses, but limits you to $4000?

[Hal_Al · Accepted solution]

Scholarships are not supposed to be  reported on any 1099 form.  But,  sometimes they mistakenly are; usually a 1099-Misc. You may have to use a workaround*, in TurboTax, if that is your case.  If "scholarship checks" were turned over to the school, they may well be reported on the 1098-T.

Q. Where are federal student loans accounted for?  

A. Nowhere on the tax forms (or in TurboTax). As you said they count as "your money for AOTC and other expenses.

Q.  I assume loans won't be in Box 5 of the 1098-T?

A. Correct.

Q. But, will loans be deducted from Box 1?

A.. No. All Qualified expenses (tuition and fees) will be included in box 1, regardless of what money (loans, scholarships or your out-of-pocket $) paid for them.

Q. The AOTC part asks about expenses, but limits you to $4000?

A. That's because it only takes $4000 of QEE to get the maximum AOTC ($2500, including $1000 refundable).

*The follow up interview that asks if there were scholarships not reported on a 1098-T also asks if any of the scholarship was already reported as earned inocme on a W-2 or 1099-Misc. 

That brings up the question, who are these "larger donors" and why are they providing money.  That is, is it really "scholarship" or soemthing else, such as "employer assistance".   "Outside" scholarships are usually sent directly to the school and reported by the school in box 5 of the 1098-T (and are not reported on a 1099 sent by the donor).

[anonymouse1]

The large ($500 or more) donors were places like the Rotary Club, Garden Club, our state (she's going to out of state school so a check was sent to her, she qualified for this because of her major), a professional organization her dad belongs to, and her brother's employer.  I don't know, does the last one count as employer assistance if it's not her employer?  That one was the largest one, and is being applied to spring tuition since she turned the check over to the school.  She also turned the smallest check of the ones I mentioned (the one from the professional organization) over to the school, it will also be applied to spring tuition.

Which leads me to another question - do I have to pay the spring tuition before the end of 2022 because the checks were issued and I presume cashed (though by the university, not her) in 2022?  If I don't, would those be considered taxable?  Or because they are being held by the university, and would be included on the 2023 1098-T, do we just ignore the fact they were received in 2022?  This is why I assumed the donors (especially the biggest one, her brother's employer) would be issuing some sort of 1099, so they could write the scholarships off on their taxes.

[Hal_Al · Accepted solution]

Q.  Her brother's employer. Does that count as employer assistance if it's not her employer?  

A.  Yes, probably.  It depends on the rules/conditions for the employer's plan.  Most employer assistance plans allow family members to collect (although a sibling is a little unusual).  Employer assistance (up to $5250) is tax free as long as it is used for qualified expenses (usually tuition).  Unlike scholarships, employer assistance can not be used for the AOTC "loop hole".   It could also be that the brother's employer has a qualified  scholarship fund (a scholarship usually comes from a foundation related to the employer, rather than from the employer it's self). 

Q. Do I have to pay the spring tuition before the end of 2022 because the checks were issued in 2022. 

A. Yes. But, just turning the checks over to the school counts as paying it in 2022. It is not neccessary that the school post the payment to the student's account in 2022. 

Q. I assumed the donors (especially the biggest one, her brother's employer) would be issuing some sort of 1099, so they could write the scholarships off on their taxes?

A. No.  It's handled on the employee's (her brother) pay stub and W-2, if it's classified as employee assistance/tuition reimbursement.   It's not uncommon for the school to show employee assistance in box 5 of the 1098-T, although that's technically incorrect.  Foundations do not issue 1099's for scholarships. They're "non-profit" organizations.

[anonymouse1]

The check from her brother's employer was definitely a scholarship, though it's only open to immediate family members of employees, it is a competitive scholarship with a limited number of recipients (4) each year, with an essay required.  Employees are not eligible AFAIK, and it is different from the assistance that her brother gets when he takes a class.  I think it did come from a foundation because during the ceremony they mentioned it was a legacy from the company's founder.

As far as handing the checks over counting as "paying" the tuition this year, I don't think the school plans on including that portion of the spring tuition in Box 1 of the 2022 1098-T.  So we would have a mismatch between the QHEE and the scholarships.  In fact, I specifically requested that these two scholarships be applied to spring tuition rather than refunding that amount to me (one came in 2 weeks after the fall bill was due, the other check was written a month and a half later!  Then mailed to our home and she just picked it up at Thanksgiving and turned it in this week when the spring charges became visible on her account and we verified that the check she turned in at the end of August was credited.) because if they were all applied to fall, then we would not have had the full $4000 for the AOTC.  So it does sound like I should pay the entire bill in December, so that the full academic year tuition is offset by the full academic year scholarships, and the difference is more than $4000.  I'm sure since she is not expecting any outside scholarships in fall of 2023, and the one given directly from the school will not be increased (though she may lose it, or it may be reduced if she takes fewer than 15 credit hours), that we will have more than enough expenses to claim the AOTC for 2023 on the basis of that semester only.

[Hal_Al · Accepted solution]

If there's a mismatch, it can be handled in TurboTax.

The 1098-T is only an informational document.  The numbers on it are not required to be entered onto your tax return.  You claim the tuition credit, or report scholarship income, 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. You will then be able to enter the actual amounts paid. You will also reach a screen that allows you to adjust the scholarship amount for "amounts not awarded for 2022 expenses".

[anonymouse1]

If Box 1 is correct, but Box 5 isn't, can I put in the correct number for that?  I'm not sure by what you mean "amount not awarded" for scholarships - is that if Box 5 is too low, or too high?

Thanks

[anonymouse1]

Oh, and I assume that loans have to be deducted before taking a 529 disbursement, unless the student is paying off the loan (it was a subsidized loan this year, so she's not going to pay it off until after graduation, when she *may* take the funds from the 529, if there is anything left - but if the $4000 AOTC expense is subtracted from Box 1 this year, then books, computer, and R&B added to determine nontaxable amount to pull from 529, without subtracting the loan amount, it would be considered double dipping when she went to pull the loan amount - at least the principal (minus the origination fee) - 4 years from now).

I'm getting way ahead of myself, but when she does pay off the loan(s), do the origination fees count as "interest" - for example, of the $1750 loan for fall semester, only $1732 was applied to her tuition, so is $18 considered deductible interest when she pays it off (for sake of simplicity, let's assume she pays it within the grace period after graduation, so there is no other interest charged)?

[anonymouse1]

The bill just posted - the scholarships we asked to be applied to the spring tuition are listed as 2023 Anticipated Aid.  So I assume won't be on the 1098-T for 2022 (unless I pay the spring tuition in 2022, and even then the first one might just come with fall tuition and no scholarships, and I'd have to ask for a correction).  Is it best to just pay the bill in January, since it looks like no one's going to send a 1099-MISC for these two outside scholarships, and it's not going to mess up our AOTC by adding them to the scholarships that were actually applied to the fall bill that I plan on declaring? 

[Hal_Al]

Q.   Is it best to just pay the bill in January? 

A.  I'm not sure what you mean by "pay the bill".  Yes, it's probably best if the school applies the scholarship check to the spring tuition, since that's what (apprarently) it's for.  In genearl, you want the schoalship matched to the tuition it was intended for. 

Don't get concerened about mismatches on the 1098-T.  The IRS doesn't try to match numbers exactly.  As previously said, you can make whatever adjustments you need in TurboTax.   Based on many posts, in this forum, corrected 1098-Ts is something schools just don't do.

Q. Since it looks like no one's going to send a 1099-MISC for these two outside scholarships, and it's not going to mess up your AOTC by adding them to the scholarships that were actually applied to the fall bill that I plan on declaring? 

A.  Yes, if you enter it correctly in TurboTax. 

[anonymouse1]

I mean literally pay the spring bill in January instead of December, if the IRS isn't really going to try to match up when the checks were written, cashed, or applied to the tuition against what's listed on the 1098-T.  I was worried these last 2 scholarships were going to be shown on the 1098-T or on 1099-MISCs for 2022, but that I wouldn't get a 1098-T for the spring expenses until 2023 so there would be a mismatch.  If you agree (after looking at the screenshot) that it looks like the school is going to show those scholarships in Box 5 of the 1098-T for 2023 (and Box 5 on the one for 2022 is likely to be zero, or just the merit scholarship from the school itself), and the spring tuition will be in Box 1 of the 2023 form, fall only in Box 1 of the 2022 form, then I will just wait to pay the spring bill in January.

[Hal_Al · Accepted solution]

Again, don't worry about what might be shown on the 1098-T.  It's highly unlikley that the IRS will do anything with it.  Even if they do, you own records will dispute it. You don't have to enter the 1098-T numbers on your tax return.  Make your payments to meet your needs (get the AOTC and the student pay no tax [or minimal tax] on the scholarhips).