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Filing Student daughter as dependent but now her scholarship qualifies as taxable income - help!

Forum|Forum|2 years ago
May 29, 2023
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I'm a minister and always filed my student daugther as a dependent. She got 26k in scholarships but according to the 1098-T $9977 (box 1 of 1098-T) of that qualifies for education related expenses. So she has to file her own taxes? And can i still claim her as a dependent on my taxes? And she files her taxes can she claim or deduct her Room and Board expenses?

Best answer by Hal_Al

Q. So she has to file her own taxes?

A. Yes. The taxable portion of her scholarship, apparently, exceeds the filing requirement of $12,950.

Q. Can I still claim her as a dependent on my taxes?

A. Yes, if she is a fulltime student under 24.

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
He lived with the parent (including temporary absences such as away at school) for more than half the year

Q. And she files her taxes can she claim or deduct her Room and Board expenses?

A. No. R&B are not qualified expenses for an education credit.

Furthermore, she cannot claim an education credit because she qualifies as a dependent.

But, you can claim an education credit, even though she is on scholarship. As others have said, 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 $26,000 in box 5 of the 1098-T and $10,000 in box 1. At first glance she has $16,000 of taxable income and nobody can claim the American opportunity credit. But if she reports $20,000 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 $2000 in expenses for those course materials, paid out of pocket, she would only need to report $18,000 of taxable scholarship income, instead of $20,000.

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400). So, she will be allowed the full $12,950 standard deduction. It is not earned income for the kiddie tax and other purposes (e.g. EIC). For grad students and post grad fellows (but not undergrads), scholarship income is earned income ("compensation") for IRA contributions.

B

Bsch4477

Employee

If box 1 didn’t include the cost of required books and computer, for example, you can add that to the amount in box 1. You can also add $4,000 to box 1 and add that $4,000 to her scholarship amount. That will result in an American Opportunity Credit greater than the increase in income tax she pays due to the scholarship. Yes, you can still claim her as a dependent and not claiming her would not give you a tax advantage. You claim the education credit and she pays the tax on the scholarship not used for qualified education expenses. Room and board expenses do not count and can’t be deducted. If she has a filing requirement you may be subject to Kiddie Tax.

Hal_AlAnswer

Employee

Q. So she has to file her own taxes?

A. Yes. The taxable portion of her scholarship, apparently, exceeds the filing requirement of $12,950.

Q. Can I still claim her as a dependent on my taxes?

A. Yes, if she is a fulltime student under 24.

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
He lived with the parent (including temporary absences such as away at school) for more than half the year

Q. And she files her taxes can she claim or deduct her Room and Board expenses?

A. No. R&B are not qualified expenses for an education credit.

Furthermore, she cannot claim an education credit because she qualifies as a dependent.

But, you can claim an education credit, even though she is on scholarship. As others have said, 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 $26,000 in box 5 of the 1098-T and $10,000 in box 1. At first glance she has $16,000 of taxable income and nobody can claim the American opportunity credit. But if she reports $20,000 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 $2000 in expenses for those course materials, paid out of pocket, she would only need to report $18,000 of taxable scholarship income, instead of $20,000.

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $12,950 filing requirement and the dependent standard deduction calculation (earned income + $400). So, she will be allowed the full $12,950 standard deduction. It is not earned income for the kiddie tax and other purposes (e.g. EIC). For grad students and post grad fellows (but not undergrads), scholarship income is earned income ("compensation") for IRA contributions.

P

PaulkwameAuthor

Thank you! This really helps!!

N

NCPERSON1

and one other clarification, to take advantage of AOTC, what is really occuring is that

1) the scholarship is taxable income to the student (the $26,000)

2) that taxable income CAN BE reduced dollar for dollar by Qualified Educational Expenses (the $9977 in box 1) and any other QEE not recorded in box 1 (e.g. books, computer.)

3) While the scholarship CAN BE reduced by the QEE, it doesn't have to be. In this case, $4,000 of the QEE is NOT applied against the scholarship income so that the parents qualify for AOTC.

The amount of scholarship income ($26,000) does not change; it's the QEE that changes (reduced by $4,000 on the student's tax return and increased from $0 to $4000 on the parent's tax return)

in this case the student will pay an additional $400 in federal tax ($4,000 times the 10% tax bracket assuming there is no other income - a little might bleed into the 12% tax bracket) and the parents are elgibile for up to $2500 in tax credits. it is important for the parents to confirm that they are eligble for AOTC, otherwise, the strategy doesn't make sense. (As long as the parent's AGI is under $180,000 and they claim the student, the parents should be eligible).

rjs

Employee

I want to clarify something that Bsch4477 said:

"If she has a filing requirement you may be subject to Kiddie Tax."

You would never be subject to kiddie tax. Your daughter will be subject to kiddie tax on her tax return if her unearned income, including the taxable scholarship income, is more than $2,300 (for 2022).