TT taking me in circles with 1098T form and who pays tax on scholarship portion used for housing

[lilbitm2a]

My dependent student received a 1098 T form where box 1 is $33,303 and box 5 is $42,400.  Of the scholarship amount listed in box 5, $9500 of that went to housing, which is a non-qualified expense, so I know we have to pay taxes on that amount.  When I add the form to my taxes, TT says that my dependent student must file a return and claim education expenses on their return. When I enter my student's tax info for their return, TT says they can't claim an education credit (which I already knew) because I'm claiming them as a dependent. The problem is TT is not charging the tax that needs to be paid from the scholarship portion used for housing ($9500) to either of our taxes--at least from what I can see, neither of our tax bills increase.  What am I doing wrong? Never thought my 1st post would be asking how get TT to charge me MORE in taxes! Other things that may be helpful:

• I have a 529 where my spouse is the owner (recipient) but our child is the beneficiary
• I received a 1099 Q form from that 529 but ALL of the distribution was used for qualified expenses and is not subject to tax
• I did enter the 1099 Q info on my taxes but not my student's
• My dependent is NOT required to file taxes based on earn/unearned income limits
• I can not claim any education credit on my taxes due to income limits

Any guidance is greatly appreciated!!

[AmyC]

Great information. You need to:

1. Remove the 1099-Q from your return since it is all a qualified distribution. IRS Publication 970, Tax Benefits for Education states on page 45: Don't report tax-free distributions (including qualifying rollovers) on your tax return.

2. Scholarship income is earned income for purposes of deciding if a return needs to be filed. If her total earned income is below the filing threshold of $13,850 there is no need to file a tax return for your daughter. If it is over that, then you do need to file a tax return for her and she may be subject to the kiddie tax. Scholarship income is considered unearned income for purposes of the kiddie tax.

See- What is the Kiddie Tax?  & About Form 8615, Tax for Certain Children Who Have Investment Income...

[lilbitm2a]

@AmyC I went back and re-entered all the info for my student's taxes and it turns out it did add the scholarship money as unearned income. I don't know why it didn't do it the first time around. I had to clear everything out and start over. Thank you very much!