Why is TurboTax treating my scholarship as taxable income when it isn't?

Forum|Forum|6 years ago
January 23, 2020
5 replies
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I am a grad student enrolled at least half time. I received a 1098-T for 2019 with $5,000 in scholarships or grants in box 5. My box 1 amount is well in excess of. I don't qualify for any education deductions. Scholarship funds were used to pay for qualified expenses, so should be non-taxable, but TurboTax is treating the scholarship as taxable and I can't figure out why and how to fix it in TurboTax.

bwergeles

Even though you used your scholarship for education expenses, there are some instances where it may be taxable.

Scholarships are taxable when used for any of the following:

Room and board
Travel
Research
Clerical help
Equipment and other expenses that are not required

Per IRS Publication 970, a scholarship is only tax-free if it is used for qualified education expenses, not designated for other purposes and does not represent payment for teaching, research or other services.

Qualified education expenses include tuition, fees, books, supplies or equipment that are required for enrollment or attendance.

If your scholarship was used only for qualified education expenses, review your entries in TurboTax to make sure everything was entered correctly. See the steps below to access your education entries:

Click on Federal from the menu on the left-hand side of the screen and then on "Deductions and Credits" at the top.
Scroll down to "Education" and click "Show More"
Click on "Start" or "Revisit" to the right of "Expenses and Scholarships" and review your entries

You may also want to do a final review of your return to make sure there are no errors. Click on "Review" from the menu on the left-hand side of the screen.

Please see this TurboTax Help Article for more information.

ribble39Author

All expenses were qualified expenses and they far exceed the scholarship amount. Everything is entered properly in TurboTax but it is still treating the scholarship amount as taxable.

KrisD15

Yes, because there are options when it comes to education credits, the program might allocate up to $10,000 of expenses towards a credit. Once that happens, it's tricky to "re-allocate" the expenses to the scholarship.

If you are working with TurboTax Desktop, go to forms and look at Form 8863.

If you're using TurboTax Online, try the steps below:

Please go back to the "Education" section. (Federal, Deductions & Credits, Scroll down to Education).

Get to the "Education Information" section (the last option on the "Here's Your Education Summary" screen).

Re-answer the interview questions until you get to the last screen. This screen should show how much of the education expenses are being allocated to a credit.

If you are eligible for the American Opportunity Tax Credit (usually the more valuable credit), the credit maxes out at 4,000 expenses, so you wouldn't want to allocate more than that.

If you are taking the Lifetime Learner's Credit, the credit maxes out with 10,000 expenses.

If you want all the expenses to be applied to the scholarships/grants/1099-Q distribution, change the amount to 0.

Type letme into the search box to see which credits you are eligible for and change the credit you claim if desired.

Once you click "Maximize My Education Tax Break" the program determines the best allocation, so don't click this if you want something different.

You can always go back to this allocation screen and change the allocation amount.

@ribble39

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emmad2001

Mine is doing the same thing. I cannot find the question to state that I am seeking a degree. I think that is why it is treating my scholarship as income. How can I answer this question, yes that I am seeking a degree when I cannot find the question. Has anyone else found a solution?

ultrawideman

I am having a similar problem for our 2020 state taxes. The federal Turbo Tax appears to be handling the 1098-T scholarship money correctly. However, the Alabama state Turbo Tax appears to be taxing the scholarship funds used for (out-of-state, grad school) qualified tuition.

AmyC

Employee

AL is one of the the few states where you define the income to be taxed in AL. Most states begin with the federal income. When you go through AL, you should be able to mark the money as not taxable. The program will ask about your different incomes. It comes to a section that says Federal Income not Taxed by AL, that would be a last resort to mark the income as not taxable and back it out.

Please review your AL return and make sure it is taxing the scholarship. AL does not tax scholarships that are not taxable to the federal. See How do I preview my TurboTax Online return before filing?

@ultrawideman

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ultrawideman

Thank you for the feedback. Ends entering the data as a 1098-T was not very clear, and my son had entered it as an additional scholarship. As you suggested, it was an entry mistake, and the erroneously entered scholarship was being taxed federally, too.

ultrawideman

Bottom line up front: 1) Find the Your Education Expense Summary and edit student to enter the 1098-T data (boxes 1, 5, 7-9), and then 2) go back and confirm the tuition section is correct. Using the TT search to link to this 1098-T entry for step 1 will not work, but will take you to step 2.

Fixed: I was having that same issue in preparing 2020 taxes. I fixed ran across our mistake when I was attempting to erase the education entries as suggest by a reply from last year. I has zeroed out my son's entry of his scholarship money, and later I went to delete the student entry under the heading "Your Education Expense Summary". I selected edit and realized this is where the 1098-T information should be entered, which is not the location that TT's search for 1098-T will send you. I believe he missed this entry because it may have been auto-populated from last year's TT form. When I went back to his original entry, I see that space was for additional scholarships. Moving the expense before the scholarships would have help tremendously. Missing this would have cost a few thousand dollars between federal and state.

rlsnyder

Thanks to all who came across and posted. It is definitely a defect. I deleted my student and entered the info with the 1098T first and the 1099Q second. and it worked... no more taxable income notifications.