1098 T Scholarship Exceeds Tuition Questions

Question

My daughter is a first year college student. We received a 1098-T from the college. This form shows that the scholarship amount exceeds the tuition amount. Even though we had to take out loans and pay out of pocket to cover all the expenses. Through research I found that the cost of Room & Board is not a qualified expense, so it's producing taxable income. My daughter did work throughout the year and is just above the standard deduction, so this taxable scholarship makes it even higher, so she has to file.

Box 1- 14406 Box 5- 16623

On top of those scholarships the loans & payments equal $3747. There is another $600 in books & other stuff that qualify. Because the room & board is $5895, its saying that she owes tax on the difference in Box 5 to Box 1. I claim her on my taxes as a dependent, when I enter the 1098 T exactly as shown, she owes a small amount for federal tax and it does not help me at all for the Education Credits.

Here's my questions- TurboTax gives me a prompt asking how much of the scholarship money was used for Room & Board. When I enter the full $5895 that the college charges, it qualifies me for the Education Credit. It then gives me a prompt that she has to claim that amount on her tax return, which increases her tax bill owed. Her tax bill owed is much less than the credit I receive, so the offset of it would be beneficial in the overall.

Am I calculating this correctly? Can I claim that full room and board cost and qualify for the credit?

This is her first year, so it's only one semester on cost. I'm thinking next year will be even more as she will have 2 academic semesters to account for, so I'm trying to figure out the best way to work around this room and board non-qualified expense (which I find absolutely ridiculous!)

Thanks for your help!

Hal_Al · Accepted Answer

@Hal_Al

Thanks so much for the help!

One last question- when I get past the entering the tuition information on my child's return- it's asking for the parents SSN. Why is it asking for this information and whose SSN do I enter here? Is it going to ask for income info, etc after this? I've never had this prompt before, I'm assuming it's because there is unearned income to tax?

Also, does it make a difference on whose SSN to put when it comes to parent vs. step parent?

My daughter is my step child on my return, I claim her as a dependent and have her whole life. TurboTax gives me the option of selecting a step child under the dependent information. I assumingly would put my SSN in on her return when it asks for it, since I'm the one claiming her and her education credits. Is this accurate?

Thanks!

Yes, taxable scholarship is unearned income*, and is subject to the "kiddie tax", wherein a portion is taxed at the parent's marginal tax rate. You will be asked for parent income.

Yes, for tax purposes, a step parent is the same as a biological parent. If you file a joint return, use the 1st name listed on the joint return. If you claim her on a separate return, yes use your info.

*Scholarship income is unearned for purposes of the kiddie tax but treated as earned for purposes of calculating the student's standard deduction (earned income + $350, but not more than $12,550)

Hal_Al · Answer

@Xxsierra1986 said: "When I enter the full $5895 that the college charges, it qualifies me for the Education Credit. It then gives me a prompt that she has to claim that amount on her tax return, which increases her tax bill owed. Her tax bill owed is much less than the credit I receive, so the offset of it would be beneficial in the overall".

Q. Am I calculating this correctly? Can I claim that full room and board cost and qualify for the credit?

A. Yes. That is allowed. You may be able to slightly reduce to amount she is taxed on. See example below.

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.