Does parent of dependent college student file 1098 T on their taxes?(parents)

[cdcswatloski]

I am working on dependent college student taxes and want to know if the 1098T is entered on the parents tax return, where we are claiming him?

[Carl]

It depends on several factors. Please read all of the below to help you make the correct decision here.

College Education Expenses

Colleges work in academic years, while the IRS works in calendar years. So the reality is, it takes you 5 calendar years to get that 4 year degree. With that said:

 - Scholarships and grants are claimed/reported as taxable income (initially) in the year they are received. It does not matter what year that scholarship or grant is *for*

- Tuition and other qualified education expenses are reported/claimed in the tax year they are paid. It does not matter what year they pay *for*.

Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below. After you read it, I have also attached a chart at the bottom. You can click on the chart to enlarge it so you can read it. If it’s still to hard to read on your screen then right-click on the enlarged image and elect to save it to your computer. Then you can double-click the saved image file on your computer to open it, and it will be even easier to read.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf Some words are in bold, italicized, or capitalized just for emphasis. This is because correct interpretation by the reader is everything. Take the below contents LITERALLY, and do not try to “read between the lines”. If you do, you’ll interpret it incorrectly and risk reporting things wrong on your taxes. For example, there is a vast difference between “can be claimed” and “must be claimed”.  The first one indicates a choice. The second one provides no choice.

If the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as at least a half time student for one academic semester that begins during the tax year, (each institution has their own definition of a half time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student ***do not count*** as the student providing their own support)

Then:

The parents will claim the student as a dependent on the parent's tax return and:

The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:

The parents will claim all educational tax credits that qualify.

If the student will be filing a tax return and:

The parents qualify to claim the student as a dependent, then:

The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.

Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.)  Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.

In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.

 If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6200, then the student doesn’t even need to file a tax return, and nothing has to be reported.

If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.

Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6200, then the student should file a tax return so as to get those withheld taxes refunded.

[kredinger1]

Confused about this part...If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses....My daughter's scholarships/grants exceed the cost of her qualified education expenses. I get that she has to pay taxes on that, but Turbo Tax is giving her the American Opportunity Education Credit even though we are claiming her as a dependent. I didn't think she qualified for the Education Credit if we are claiming her as a dependent.

[Carl]

I am assuming the following:
1) Your daughter is in fact, reporting all the education stuff on her return.
2) Your daughter selected the option for "I can be claimed on someone else-s return"
If she's getting that credit, it's because she incorrectly indicated the following on her tax return.
A) My parents qualify to claim me. (this is correct)
B) My parents are not claiming me(this is incorrect)

Remember, weather you actually claim your daughter as a dependent or not is irrelevant. If you *qualify* to claim her, then it doesn't matter if you claim her or not. She must still select the option for "I can be claimed on someone else's return".
Now, in your case since she is claiming all the education benefits anyway, if you choose to NOT claim her, then she *can* qualify for the AOC credit if she selects as per item B above. It's a kind of loop hole in the tax law that allows this. But it's not really a loophole so-to-speak. Either you get to deduct $4050 from your taxable income for claiming her as your dependent, *OR* she gets the AOC if you don't claim her. But not both.

[kferderer-tax-]

Can the parent (who claims student as dependent but student takes 1098T and scholarships on students tax return) get AOC credit on parent's tax return for books paid for by parent?

[Carl]

Hey @Hal_Al isn't it better for the student to take the AOC? You're more informed on this "splitting the credits" thing than I am.

[Hal_Al]

First, I agree with you that in kredinger1's case his daughter is entering something wrong. She should not be getting the AOC.

It's not better for the student to claim the AOC. They are almost always not eligible. And even when they are they only get $1000, instead of the $2500 the parents get.

In  kferderer#tax!'s case he can claim the AOC since the student is his dependent. He can claim not only books but up to $4000 total tuition and expenses. There is a tax “loophole” available. The student reports all his scholarship, up to the amount needed to claim the American opportunity credit, as income on his return. That way, the parents 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 2. At first glance he/she has $2000 of taxable income and nobody can claim the AOC. But if she reports $6000 as income on her return, the parents can claim $4000 of qualified expenses on their return.
From the form 1040 instructions (pg 47): “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income.”

[kferderer-tax-]

Actually parent will not be able to claim tuition for AOC since sports scholarship covered tuition (billing shows application of scholarship toward tuition) but since books are qualified expense, can parent claim only books toward AOC on parent return (along with other dependent's qualified expenses)?