Entering Excess Scholarship Funds as Income

Forum|Forum|4 years ago
April 2, 2022
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My son (who I can and do claim as a dependent on my return), received a 1098-T for first time. He did not receive a W-2 as he has no income. Box 5 of his 1098-T exceeds Box 1 by less than $100. He does not meet the threshold for filing a return, but Turbo Tax indicated to me on my return that my son had to file. Maybe I'm being paranoid, but do I need to include this small amount as income on my return? How do I do that within Turbo Tax? Thanks.

Hal_Al

Employee

Q. Do I need to include this small amount as income on my return?

A. No. In fact, you are not allowed to put his income on your return. If it needs to be reported, it goes on his separate return. It is not enough to need to be reported.

Your dependent child must file a tax return for 2021 if he had any of the following:

Total income (wages, salaries, taxable scholarship etc.) of more than $12,550 (2021).
Unearned income (interest, dividends, capital gains, unemployment, taxable portion of 529 distribution) of more than $1100.
Unearned income over $350 and gross income of more than $1100
Household employee income (e.g. baby sitting, lawn mowing) over $2300 ($12,550 if under age 18)
Other self employment income over $432, including money on a form 1099-NEC

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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.