Tuition Tax Credit with a Scholarship

Question

I think I might qualify for a tuition tax credit in 2021 but I'm not sure, and I don't know how to approach this correctly in Turbo Tax (Home and Biz on Mac).

My 20-year old, dependent daughter (call her Jane) had university tuition and mandatory fees of $11,346.00.

Jane also had university room and board of $12,357. Jane dropped the meal-plan in the fall and had food expense of $2,800 (this is in addition to the $12,357 mentioned previously).

Jane bought books costing $1,078 that could be purchased anywhere of her choosing.

Jane had scholarships totaling $13,750 from the university that could be applied to any of the fees or expenses charged by the university.

Jane was a full-time student in the spring and fall of 2021.

Jane didn't receive a 1098-T from her university because they don't, by default, provide a 1098-T to students having scholarships that exceed tuition and mandatory fees. Jane's university said they would generate a 1098-T if we direct them to do so. I'm not sure if that's necessary or if the numbers would absolutely match above (they may account for some of the mandatory fees differently than I have.)

Jane has already filed her return and didn't include anything about her education costs or scholarships. Jane's return could be amended but all things being equal we would prefer not to do that.

I've been reading about some options that could provide a tuition tax credit by accepting some of the scholarship as income. Not sure whether that would be income my return or Jane's return (already filed).

Basically, I'm looking for guidance on how to handle the info above in the most beneficial manner and how to do so in Turbo Tax.

Thank you. I really appreciate the assistance.

Hal_Al · Answer

Yes, you can claim a tuition credit, on your return, since she is your dependent. To keep it simple, just enter $4000 of tuition, on your return (the amount needed to get the maximum $2500 American Opportunity credit).

In TurboTax (TT), enter at:

Federal Taxes Tab (Personal for H&B version)

Deductions & Credits

-Scroll down to:

--Education

--Education Expenses

Answer no to "did you get a 1098-T", but indicate you qualify for an exception. You will be allowed to enter tuition.

She will need to file an amended return, reporting $4000 more of her scholarship as taxable. She should have already reported $1326 as taxable (13,750 -11,346 - 1078 = 1326). Room and board are not qualified expenses for tax free scholarship or the tuition credit. A required computer is a qualified expense.

Enter the 1098-T, exactly as received, on the student's return. Enter book expenses separately. In his/her interview, you should eventually reach a screen called "Amount used to calculate education deduction or credit" Be sure the amount in that box is $4000. That will put all his excess scholarship as income on his return.

Be advised some people are saying they're not getting the "Amount used to claim the tuition deduction or credit" screen on the dependent’s . The alternate workaround is to enter $4000 less than the actual box 1 amount, when you enter the 1098-T

There's yet another (and simplest) work around. Manually calculate the taxable amount of scholarship and enter the 1098-T, on his return, with 0 in box 1 and the taxable amount in box 5. In that case be sure the amount in the "Amount used to claim the tuition deduction or credit" (if it shows up) box is 0.

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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.