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Does my daughter have to file her own return if her scholarship amount is $4000.00 over her tuition amount? Can I still claim her on my tax return also?

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June 4, 2019
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My daughter's scholarship amount is $4000.00 over her tuition amount on her 1098-T form. Turbo tax says she needs to file a return. She also worked and made about $3000.00 but that is under the amount needed to file. If she files her own return should I or can I still claim her on mine? Who needs to claim the 1098-T form my daughter or me?

TurboTax Premier Windows

Best answer by Carl11_2

Since your daughters "total" reportable income is more than $6300, she is required to file a tax return. You the parent still claim her as your dependent. Her total taxable income includes the $4K of excess scholarship, and the $3K she earned at the W-2 job. So her total taxable income is $7K meaning that she is required to file a tax return.

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 a full 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.

1099-Q Funds

First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to line 21 of the 1040 with an annotation of "SCH" next to it.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is transferred to line 21 of the 1040 with an annotation of "SCH" next to it.

Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over that are taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.

I

Idaho9

Carl,
Can you clarify how the parent claims the 1098-T for their child in TT Premium? I've tried multiple ways and am not getting any option to claim scholarship for anyone other than myself and spouse.
Once I say my daughter doesn't have over the limit in interest and dividends, it tells me she doesn't have to file.
If I say she has taxable income that isn't only interest and dividends, it tells me I can't claim her.
Thanks

Carl11_2

Employee

Re-read the below. It's a lot, because it covers multiple situations. The thing to do is print it out first. Then as you read it through, use a black marker to line out that which is not applicable to your situation. Then when you read it through again you'll only be reading that which applies to your situation and it's easier to comprehend then.
Overall though, you the parent claim the student as your dependent. Period.
Next, if all qualified education expenses are covered by scholarships, grants and/or 529 funds, then while you the parent claim the student as your dependent, that's all you claim. You the parent don't claim or report anything on the education stuff because you the parent get no credits, since you the parent did not pay any "qualified" out of pocket expenses. (All qualified expenses are covered by scholarships, grants and/or 529 funds)

The student files their own tax return *IF* the total of
1) excess scholarships, grants, 529 funds not used for qualified expenses.
2) W-2 earned income earned by the student
3) self-employed income earned by the student
DOES EXCEED $6300. If the total of all three items above does NOT exceed $6300, then the student is not required to file a tax return and nothing is reported concerning education expenses on any tax return what-so-ever.
Note that if the student is required to file a tax return, then the student is also required to select the option for "I can be claimed on someone else's return". The student must select that option weather you the parent claim the student as your dependent or not. The student must select that option because you the parent *QUALIFY* to claim the student as your dependent.

I

Idaho9

Thanks Carl. I partly ask because we are trying to decide if we have to claim her and what is the best way to go about it. When we read the IRS rules about whether or not she needs to file found here, <a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p929/ar02.html#en_US_2016_publink1000203738">https://www.irs.gov/publications/p929/ar02.html#en_US_2016_publink1000203738</a>, it was unclear what the scholarship excess was considered. When we ask H&R we were told it was neither earned income or unearned income and that she should get $1000 education credit (which didn't make sense to us, hence the asking my question on here).

So is the excess scholarship (she is above $6300) considered unearned income? The tax rules in Pub929 say that unearned income under the amount of $10,500 can be claimed on the parent's tax return with a warning that part will be taxed at the parent tax percentage. That is why we were looking for the spot to claim her information on our returns. It's looking like if she is filing her own and says she can be claimed, whether we claim her or not, she'll be taxed at our rate anyway. So it would make sense just to claim her as a dependent and report her scholarship on our return to start with rather than have her file her own taxes.

Secondly, Her scholarship pays all her expenses, so is she really eligible to be claimed as a dependent? We've been told that we can't count the scholarship money towards the rule "Support. Your child's support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your child's support, count support provided by you, your child, and others. However, a scholarship received by your child is not considered support if your child is a full-time student. For details, see Pub. 501, Exemptions, Standard Deduction, and Filing Information." But I don't pay her support either, so do I have to say she can be claimed still?

If we are claiming her and she does have to file, do we have to file the 8615 or does she file that?

Carl11_2

Employee

You're overcomplicating things. Weather the income is earned or unearned doesn't come in to play here. It's "taxable" income, and that's basically all that matters. You are correct in that the excess scholarship money (and only that money) is taxed at the parent's rate. The program is designed so that the student claims it on their tax return, because with rare exception, excess scholarship is "always" returned to the student - not the parent. I'm just not all that familiar with the 8615 form. But from what I see on page 1 of the instructions at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i8615.pdf">https://www.irs.gov/pub/irs-pdf/i8615.pdf</a> in the "Who must file" section, I interpret it as the 8615 is required. What I'm not clear on though, is what tax filer actually files it. From looking at the form itself, and the instructions, I would think the child would file it with their tax return since they are the one that actually received the unused scholarship money, and it is taxable income to the student - not the parent.
Now "can" the parent report it on their tax return? From what I see, the answer to the question is YES. But I don't see anything saying the parent is "required" to be the one to report it. While the parent can of course, it doesn't appear to me that the program is very well designed for such a scenario.

Carl11_2Answer

Employee

Since your daughters "total" reportable income is more than $6300, she is required to file a tax return. You the parent still claim her as your dependent. Her total taxable income includes the $4K of excess scholarship, and the $3K she earned at the W-2 job. So her total taxable income is $7K meaning that she is required to file a tax return.

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 a full 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.

1099-Q Funds

First, scholarships & grants are applied to qualified education expenses. The only qualified expenses for scholarships and grants are tuition, books, and lab fees. that's it. If there is any excess, then it's taxable income. It automatically gets transferred to line 21 of the 1040 with an annotation of "SCH" next to it.

Next, 529/Coverdell funds reported on 1099-Q are applied to qualified education expenses. The qualified expenses for 1099-Q funds are tuition, books, lab fees, AND room & board. That's it. If there are any excess 1099-Q funds they are taxable. The amount is transferred to line 21 of the 1040 with an annotation of "SCH" next to it.

Finally, out of pocket money is applied to qualified education expenses. The only qualified expenses for out of pocket money is tuition, books, and lab fees. Room & board is NOT a qualified expense for out of pocket money.

When you have a 1099-Q it is extremely important that you work through the education section of the program in the order it is designed and intended to be used. If you do not, then there is a high probability that you will not be asked for room & board expenses, and you could therefore be TAXED on your 1099-Q funds.

Finally, if "all" qualified expenses are covered by scholarships, grants, 1099-Q funds and there is ANY of those funds left over that are taxable. While the parent can still claim the student as a dependent, it is the student who will report all the education stuff on the student's tax return. That's because the STUDENT pays the taxes on any excess scholarships, grants and 1099-Q funds.

C

cincityellisAuthor

Thank for the info. I do have another question. Is it common for the scholarship amount to be higher than the tuition? This is my daughter's third year and this is the first time this has happened. Also I can claim her as a dependent but should I on my tax return? Would this be better for my daughter on her tax return? Even though I know she still needs to say someone else is claiming her. Thanks.