1098 T

Q. My son has a higher number in box 5 on his 1098T than in box 1. Does he have to claim the difference as taxable income on his taxes?

A. Yes. He can reduce the taxable amount by entering expenses for books and other "course materials", including a required computer.  Room and board are not qualified expenses for tax free scholarship (don't enter r&b). 

Q. His income is more than the 12,000. If yes, how does he enter it in TurboTax (TT)?

A. Enter the 1098-T on his return and follow the interview. He will be allowed to enter the additional expenses and TT will calculate the taxable amount and enter it on line 8r of Schedule 1.  Be on the look out for a screen called amount used to claim the education credit  (or some such wording).  TT may assume, the parents claimed the credit and prepopulated that box. Change it if necessary.

If you run into a snag; there's a short cut. Manually calculate the taxable amount and enter the 1098-T, on his return,  with 0 in box 1 and the taxable amount in box 5. 

Be aware; "the kiddie tax" will, most likely,  apply, if his total income is more than $13,850. 

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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.