1098-T and 1099Qs and scholarships

Question

We have a 529 plan which we have used to cover my son's college expenses. My husband is the recipient of the 1099-Q, and we paid the school after taking the funds out of the 529. My son has received a 1098-T, which included a $5000 scholarship in box 5. However, the money we withdrew from our 529 (box 1 of 1099-Q) is exactly equal to all of my son's college expenses. We did *not* account for his $5000 scholarship. If we claim both the 1099 and the 1098 on our tax return, we end up paying tax for the extra $5K scholarship, since it exceeds our educational expenses.

I have seen several TT posts regarding scholarships, and it sounds like we could have my son claim the 1098-T on his tax return instead? And then he is taxed for the scholarship at a lower rate (or not at all, if he makes less than a certain amount?)? Is something like this possible, and if so, how would we do that?

We do NOT qualify for any of the Education credits because our MAGI is over the limit. We are claiming him as a dependent currently, but maybe it's better if we do not claim him?

Hal_Al · Accepted Answer

Thank you.If I understand correctly: When my son files his tax return, he reports his 1098-T (but he can/should leave the box 1 blank, since we paid that amount with the 529 and reported the 1099-Q on our tax return?). Because his total income is below $13,850, he will NOT be taxed on any of his income (including scholarship), and he should be able to get a refund of his federal income tax that was withheld? In the future, if his income goes above the $13,850, he will need to pay a "kiddie tax" on the excess amount over that limit? Since we will not get any credits by claiming him as a dependent, does it matter whether we claim him or don't claim him? If we do NOT claim him, can our son get any refundable (education) credit at all? (Hal_Al stated: If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. ) I'm assuming he will not have a tax liability, because he would not owe any taxes, correct? Thank you! Q. Since we will not get any credits by claiming him as a dependent, does it matter whether we claim him or don't claim him?A. No. If your income is above $180K, you don't get the AOTC. If it's above $400K, you don't get the ODC. Q. If we do NOT claim him, can our son get any refundable (education) credit at all? A. No. Congress specifically wrote the law to  prevent that (ineligible parents tying to switch the refundable credit to the kid). Furthermore,  a student who is not actually claimed as a dependent, must still check the box, on form 1040, that says he CAN be claimed as a dependent.  Q.( If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. ) I'm assuming he will not have a tax liability, because he would not owe any taxes, correct?A. Correct  Q. When my son files his tax return, he reports his 1098-T (but he can/should leave the box 1 blank, since we paid that amount with the 529 and are claiming the 1099-Q to be tax free?A. Yes.  Entering it that way is a short cut.  Q. Because his total income is below $13,850, he will NOT be taxed on any of his income (including scholarship), and he should be able to get a refund of his federal income tax that was withheld?A. Yes. The answer might be different if he had any unearned income (e.g. interest, dividends. capital gains, taxable 529).  Q. In the future, if his income goes above the $13,850, he will need to pay a "kiddie tax" on the excess amount over that limit?A. Yes, if his income is earned income (wages) and taxable scholarship*. The $13,850 could be a lower amount, if  he has unearned income, e.g. interest, dividends. capital gains, taxable 529).  If his income is mostly wages, then the $13,850 would be higher. If his income is all wages (no scholarship) then the kiddie tax doesn't apply at all.  *Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes.

Hal_Al · Answer

Q. t sounds like we could have my son claim the 1098-T on his tax return instead? And then he is taxed for the scholarship at a lower rate (or not at all, if he makes less than a certain amount?)? Is something like this possible?

A. Yes, that's the way to do it. Taxable scholarship must be reported on his return, not yours.

Q. How would we do that?

A. Simple way: enter the 1098-T on his return with box 1 blank and the scholarship amount in box 5. TT will treat it as taxable. Otherwise, enter the 1098-T, as is, when asked if any of the scholarship was used for room and board, answer yes and enter the amount. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.

Speaking of room and board, room and board are qualified expenses for the 1099-Q, even if the student lived at home, as are books and a computer.

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. 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. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!

References:

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."
IRS Pub 970 states: “Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return”.