Tax Year Prior to 2020: Are you required to file your 1098-T form?

[LFields]

She is a grad student and no longer our dependent.  Her tuition and expenses were paid out of her 529, but TurboTax is deducting the $2000 in box 5 from her qualified educational expenses, resulting in excess 529 distributions of $2000. Despite the fact that the entire amount of the tuition in box 1 and her other expenses were actually paid out of the 529, over and above the $2000 scholarship. Is it still ok for her not to include the 1098-T on her return? By the way, per TurboTax, she is not eligible for the Lifetime Learning Credit because she used 529 money for tuition.

[Hal_Al]

The 529 distribution changes things.  The Lifetime Learning credit (LLC) is a non refundable credit. If the student has a tax liability, she may be able to claim it.

The 1099-Q and the  1098-T are only informational documents. The numbers on them are not required to be entered onto you (your student's) tax return. 

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." 

TurboTax is (probably) doing it right, but not necessarily what's best for her. There are three things you can do with your Qualified educational expenses (QEE):

1. Allocate then to scholarships (so that the scholarship remains tax free)
2. Use them to claim an education credit
3. Allocate them to the 529 distribution (1099-Q) so that it will not all be taxable

TurboTax allocates QEE, in that order, until you tell it otherwise. Depending on the calcs, You may not need to enter anything. .. It gets complicated. 

Provide the following info for more specific help:

• Box 1 of the 1098-T
• box 5 of the 1098-T
• Any other scholarships not shown in box 5
• Does box 5 include any of the 529 plan payments (it should not)
• Is any of the Scholarship restricted; i.e. it must be used for tuition
• Box 1 of the 1099-Q
• Box 2 of the 1099-Q
• Who’s name and SS# are on the 1099-Q, owner or beneficiary (who’s the “recipient”)?
• Room & board paid. If student lives off campus, what is school's R&B charge.  
• Other qualified expenses not included in box 1 of the 1098-T, e.g. books & computers
• How much other taxable income does the student have, from what sources
• Is the student half time or more?

[LFields]

Thanks for the very detailed response.  I'm glad you asked the last question: although TurboTax is giving her $626 in income because of the $2000 scholarship, she will still not owe tax on it because her income is under the standard deduction amount. I am still mystified as to how any of the $2000 is considered income.  For the record: Box 1 ($5899) , Box 2 ($2000), no other scholarships, no 529 payments in Box 5, scholarship was from university and applied directly to tuition, daughter is full time student and owner of 529, total in Box 1 of 1099Q matches amounts paid for tuition, room, board & books.

[KrisD15]

Since you say the distribution was used for tuition, that would lower Box 1 to zero, so the 2,000 scholarship has nothing to be matched to. It would be taxable income.

Box 1 does not report tuition AFTER the scholarship, it should report ALL payments made, whether paid by a distribution, scholarships, or cash.

I assume she had Room and Board expenses, whether in a Dorm or her own apartment (even if living at home). 

I suggest you allocate part of the distribution to food and lodging expenses/Room and Board. I would think that would be in excess of 2,000. It cannot be more than what the school would charge for on-campus housing. 

Pub 970

[Anonymous]

Hi Thomas,

I can see your post is from 2020, so not sure if you will see my question.  I have a similar situation and feel the same way.  

I'm wondering if my daughter needs to file or not.  She has no other income from work or any other source, but her 1098-T box 5 was greater than box 1.  Then there is also a $ amount in box 4 and I don't understand what that is for.  The difference between 5 and 1 is somewhere between $4 and $6k.  The reason I don't know the difference is because I don't understand what box 4 has to do with it.  We didn't pay anything out of pocket for tuition.  We paid out of pocket for some of the room and board, but not tuition.  Supplies were covered by scholarships and grants.  I don't think the AOTC will help us.

Do you think she needs to file?  I'm not sure if $6k is high enough to be taxed, but at the same time I'm worried about not filing and having it be a problem later when we apply for financial aid for 24-25 school year.

Is there any harm in filing it even if she owes nothing?

Thank you so much!:)

[Anonymous]

I'm confused.  If all income needs to be reported, but something else determines if you need to file or not, what do you mean by reported?  Are reporting and filing the same thing?  Who are you reporting the income to if you don't file?  Or do you mean the school has to report the income, not necessarily the student/parents? Thank you!

[Hal_Al]

There are filing thresholds. If you make more than that, you are required to file. If you make less you are are not required to file.

Once you are required to file (exceed the threshold), you must include (report) all income. 

Your dependent child  must file a tax return for 2022 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,950 (2022).
2.          Unearned income (interest, dividends, capital gains, unemployment, taxable portion of 529 distribution) of more than $1150 (2022)
3.          Unearned income over $400 (2022) and gross income of more than $1150 (2022)
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2300 ($12,950 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

Even if he had less, he is allowed to file if he needs to get back income tax withholding. He cannot get back social security or Medicare tax withholding.

In TurboTax, he indicates that somebody else can claim him as a dependent, at the personal information section.

[Hal_Al]

Q.  She has no other income from work or any other source, but her 1098-T box 5 was greater than box 1. The difference between 5 and 1 is somewhere between $4 and $6k.  The reason I don't know the difference is because I don't understand what box 4 has to do with it. I'm wondering if my daughter needs to file or not?

A. No. $6000 is less than the $12,950 threshold. 

Q. At the same time I'm worried about not filing and having it be a problem later when we apply for financial aid for 24-25 school year.  Is there any harm in filing it even if she owes nothing?

A. No. It's a common situation for FAFSA.  In, particular, you may want to have her file to document the reporting of the scholarship income if the  parent's uses  the "loop hole". 

Q.  I don't think the AOTC will help us?

A. If your income is too high (>$180K Married Filing Jointly), you are not eligible for the AOTC.  If your income is too low, 40% ($1000) is refundable (you get it even if you have no tax liability). 

_______________________________________________________________________________________

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.

[jayada]

can i use it as american credit

[Hal_Al]

Q. can i use it as american credit?

A. Maybe. 

See eligibility rules:

 https://www.irs.gov/Individuals/AOTC

https://www.irs.gov/newsroom/american-opportunity-tax-credit-questions-and-answers

https://www.irs.gov/credits-deductions/individuals/education-credits-questions-and-answers

 https://www.irs.gov/individuals/llc

See Also see this TT FAQ https://ttlc.intuit.com/questions/3383321-why-didn-t-i-get-a-credit-or-deduction-for-education-expen...

https://ttlc.intuit.com/community/college-education/discussion/i-have-a-1098-t-form-that-i-received-...

There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit. 

You cannot claim a credit if you are, or can be, claimed as a dependent by someone else.

Reference: Line 7 instructions for form 8863. https://www.irs.gov/instructions/i8863