scholarship $1225 for son, only income, reported on 1099 MISC Box 3, check not received by college until 2022 so not on 1098T

Forum|Forum|4 years ago
April 9, 2022
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My 18 year old son is a full time college freshman and we claim him as a dependent on our taxes. He had a scholarship of $1,225 from selling boy scout popcorn over the years. The payout was done in December 2021 and the check was sent to his university. My son, listed as the recipient, received a 1099 Misc with Box 3 $1,225. This was his only income. The university received and processed the scholarship payment in 2022; therefore, the scholarship is not listed on the 2021 1098T Box 5. So my first question is... is my son required to file a tax return if this is his only income? The IRS filing requirements for dependents, including Table 2, does not indicate that he is required to file a tax return. My second question is regarding our (parents) tax return. We want to enter the education info from the 1098T on our tax return so that we can claim the AOTC and also show room and board payment to cover our 1099Q distribution. Is there any issue with us entering the education info on our taxes?

KrisD15

"So my first question is... is my son required to file a tax return if this is his only income?"

No, he would still be under the filing requirement. He COULD file and claim the 1099-MISC as "other income" so that the IRS knows it is not Self-Employment income (which WOULD require he file) but his tax liability would be zero and he may need to paper-file and mail the 1040.

"My second question is regarding our (parents) tax return. We want to enter the education info from the 1098T on our tax return so that we can claim the AOTC and also show room and board payment to cover our 1099Q distribution. Is there any issue with us entering the education info on our taxes?"

No issue, in fact since you claim the student, you would enter all education information including Forms 1098-T and 1099-Q into your program so that your TurboTax program can do the math and calculate an education credit if applicable.

Education credits can be tricky because you have options of how expenses and payments can be allocated.

YOUR TurboTax program may suggest the student claim additional income if the tax on the income the student needs to claim is less than the credit you receive.

Be aware that when a 1099-Q is involved, the program may suggest the student claim part of that distribution since tax is only on the earnings portion of the distribution; HOWEVER, this is considered "Unearned Income" and could trigger Kiddie tax. Scholarship income on the other hand is earned income, so has a higher filing requirement limit.

You don't tell us the numbers on the 1098-T so we can't give much more advice, but IRS Pub 970 is quite helpful and worth looking over.

If the 1,225 is not allocated to 2021 Education Expenses, (because the student is claiming it in 2021) you can use the expenses next year since that should be included in Box 1 of the 2022 1098-T. If the 1,225 is also included in Box 5 of the 2022 Form1098-T, you will need to adjust that out since you had reported it for 2021.

The 1098-T does not always report events properly. You might need to compare it with your school account statement as well as your own records. Keep copies with your tax files.

The AOTC may only be used four times per student and only for undergraduate years.

The credit maxes out with 4,000 expenses.

If the student will be attending five tax years, try to plan if the first or last year will be best for that credit.

The Lifetime Learning Credit as no limit for years claimed.

IRS PUB 970

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Hal_Al

Employee

Q. Is my son required to file a tax return if this ($1225 on a 1099 Misc in Box 3) is his only income?

This was his only income.

A. Simple answer: No

But, be advised, there is a slight chance of hearing from the IRS. 1099-Misc income is normally unearned income and filing threshold is only $1100 (not $12,550). Technically, he could have $125 of taxable income. The fact that the money went directly to the school is evidence that it is scholarship (which is earned income, when taxable). So, in the unlikely event you hear from the IRS, it's easily explained. Hopefully, the IRS has better things to do then come after kids for $13.

Q. Is there any issue with us entering the education info on our taxes?

A. No. That's how it should be done.

Hal_Al

Employee

You can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You also cannot count expenses that were paid by tax free scholarships. You cannot double dip!

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."

If you do enter it, enter the 1099-Q before you enter the 1098-T and other expenses.

________________________________________________________________________________________

Qualified Tuition Plans (QTP 529 Plans) Distributions

General Discussion

It’s complicated.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q.
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit, that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q.
Example:
$10,000 in educational expenses(including room & board)

-$3000 paid by tax free scholarship***

-$4000 used to claim the American Opportunity credit

=$3000 Can be used against the 1099-Q (usually on the student’s return)

Box 1 of the 1099-Q is $5000

Box 2 is $2800

3000/5000=60% of the earnings are tax free; 40% are taxable

40% x 2800= $1120

You have $1120 of taxable income

**Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, you cannot double dip! When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution."

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit. Most people come out better having the scholarship taxable before the 529 earnings