How much of scholarships do you want to allocate to "room and board and noneducational expenses?"

Question

Hello,I am filing our taxes (married filing jointly with dependent college freshman, that's 19 years old - not required to file taxes as he only earned $1,007 with a summer job) and I am stuck on this question: "How much of the $21,300.00 you received in Pell grants and scholarships do you want to allocate to room and board or other noneducational expenses?" Here is the info I entered so far into each of the questions asked: I filed my 1098-T form with box 1 = $18,839.88 (tuition) and box 5 = $20,300.00 (scholarships) Did I pay for books or materials for school? YES Cost of books and materials that you had to buy directly from the school: $85 Cost of books and materials that you didn't have to buy directly from the school: $429.19 Your 1098-T reported $20,300 in scholarships or grants. Did you receive any other scholarships or grants not reported on a 1098-T? YES Enter the total amount of other Pell grants, scholarships, and fellowship grants you received for educational expenses paid: $1,000 (scholarship) Do you want to allocate part of your Pell grants or scholarships to room and board or other noneducational expenses such as travel, research, or certain equipment? YES How much of the $21,300 you received in Pell grants and scholarships do you want to allocate to room and board or other noneducational expenses? ????***How do you figure this number? Or do I need to answer "No" above? Also, I am confused about whatever number we enter in the Box in question, it says "If you enter an amount here, be sure to include it as income on Student's tax return" - does this now mean we need to file a tax return for our student as well? Or that depends on the amount entered? I believe $1,250 is the max of unearned income allowed before they would need to file taxes, is this accurate? And would it even be worth it if we need pay taxes on whatever amount this is? I am trying to get the refund owed to us, not anything extra or unusual, I am just not sure the best way to answer this question and be accurate. Please help if you can, I am about frazzled with this and no tax offices are taking new clients before the deadline. Thank you in advance. More info about us: I am married filing jointly (less than $160,000 annual income) College student is 19 and only worked a summer job, we are claiming as a dependent. All money received was scholarship money, no pell grants. Actual cost of health fee, room & board: $4,944 (I know room and board aren't included in QEE I'm just trying to figure out exactly what amount to use here to get accurate results.  After all scholarships, we wrote a check to the university for $2,484 to cover the remaining room & board expenses.

Hal_Al · Answer

There is a tax “loop hole” available to claim an education credit, for the parents of students on scholarship. 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.

In the 2nd example, you tell TT that you want $5000 of the scholarship to be allocated to Room and Board.

In your case, since student only has $1007 of other income, the additional $6974 (quick calculation) of taxable scholarship is not enough to generate a tax liability. He does not even need to file.

Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.

The IRS actually encourages use of this technique. From the form 1040 instructions: “You may be able to increase an education credit if the student chooses to include all or part of a Pell grant or certain other scholarships or fellowships in income. For more information, see Pub. 970, the instructions for Form 1040 and IRS.gov/EdCredit". PUB 970 even has examples of how to do the “loop hole”.