Form 1098-T / Unusual scenario / Suggestions??

[FEDUKE404]

We all groan over the "useless" Form 1098-T, but here is a new twist to ponder. All input is welcomed.

SYNOPSIS:

Student is recipient of full-ride scholarship, so taxable income to be reported on wage line of Form 1040 is fully expected.

The Form 1098-T shows amounts in Box 2 (amounts "billed") and Box 5 (scholarships). Those dollar amounts have now been verified as being completely accurate. The amount in Box 5 is greater than the amount in Box 2 by less than $500.

Now for the fun: The amounts in Box 2 cover the Fall 2011 semester and the Spring 2012 semester. (Nothing unusual about that at all! ) The normal school policy is spring semester payments must be made by the end of the preceding calendar year, so in most cases a parent can use "all" of the amount in Box 2 for dealing with AOC etc. However, the scholarship amount in Box 5 covers only the Fall 2011 semester. The student account shows that the scholarship payments for the Spring 2012 semester were applied in early January of 2012, so for purposes of Form 1098-T those are deemed a "2012" issue and not a "2011" issue. (The school is likely viewing those as a calendar year issue.)

So.......assuming I've already done all homework re what is/is not covered by the scholarship...... is the 2011 taxable income:

1 - The difference between the qualifying costs for both semesters and the scholarship amounts for both semesters (realizing the Spring 2012 scholarship is not reported on the tax document) or
2 - The difference between the qualifying costs for only the fall semester and the actual scholarship amount actually shown (fall semester) on the Form 1098-T ??

(No matter what happens, some numbers other than those shown on the Form 1098-T will have to be used. I may have to browbeat my tax software to create the proper number, even though I logically can figure out the correct amount for either choice.)

The school ("Bless their hearts!!") is totally uncooperative, and will not even discuss their reporting procedures even with no student name involved, citing privacy rules. So far as I can determine, there will NOT be a Form W2 issued.

Trying to apply logic here, the taxable income for each semester will for all intents and purposes result from the scholarship payment for room/board and a few other leftover items. You have to note that, under the current reporting system, when the student is a senior the Form 1098-T will likely show -0- qualifying expenses, and the full scholarship amount for the spring semester of that year. At first glance, a significant amount of taxable income. (This is opposed to the 2011 document, which at first glance indicates "not too much" potential taxable income, but of course that conclusion is worthless because of underlying apples/oranges issues re the document.)

Depending on what the "experts" here say, this is my tentative approach: From the facts available, consider the only potential taxable income was created by the scholarship paid during 2011. Even though the qualifying expenses for the spring semester are on the 2011 Form 1098-T, the (potential) "income" due to scholarship for that semester did not arrive in 2011, making that a tax year 2012 consideration instead.

In so many words, I plan to "follow the income." Am I close?? Is this a reasonable approach?? (Remember this is likely a "four-year problem" for me.)

Finally: Parents had years ago set up Coverdell accounts in the name of this child, who likely (hopefully) will receive this scholarship throughout college. Is it likely/probable/certainty they will have to endure some future taxable income via Form 1099Q? There is a younger sibling in the wings.

Thanks to all. Hopefully someone has encountered this scenario before!

FE

[Koss]

Billed vs. Paid

I think you're using the right approach.

The amount billed, shown in Box 2, was not actually paid until the scholarship was applied.

The amount billed is, in most cases, meaningless. In fact, in most cases, the entire Form 1098-T is meaningless, and the IRS knows this.

I had a client that had no scholarships at all--just student loans. They didn't have the complex issues your client has. They got hit with a correspondence audit by the IRS. The 1098-T only had an amount "billed," and no amount paid. The IRS demanded that they submit account statements to show that it had actually been paid.

In cases like yours, the figures on the 1098-T cannot be used to prepare the return, and I think the IRS understands this. That doesn't mean your client won't get a correspondence audit. They might. But if you have the account statements to back up your figures, you should be fine.

I think you've reached the right conclusion. The easiest way to explain it is...

The student is not using the accrual method of accounting.



BMK

[Koss]

Coverdell

On a Coverdell account, they can change the beneficiary so that the younger sibling can use the money for qualifying educational expenses.

Check the rules, though. They might have to change the beneficiary before one of the two children reaches a certain age.

BMK

[BP.]

the entire Form 1098-T is meaningless

Very nearly . . . . At the minimum, the checkbox that indicates whether student is at least half-time is useful.

[BP.]

is the 2011 taxable income:

1 - The difference between the qualifying costs for both semesters and the scholarship amounts for both semesters (realizing the Spring 2012 scholarship is not reported on the tax document) or
2 - The difference between the qualifying costs for only the fall semester and the actual scholarship amount actually shown (fall semester) on the Form 1098-T ??

I'll vote for the second choice.

Looks like pub 970 for TY 2011 isn't posted yet, but there's a worksheet on p.5 of last year's. It starts with Scholarship Income, which you have the amount of, and then (among other calculations) takes out the qualified education expenses paid with the scholarship, which in your case I think should just be the 2011 expenses, disregarding billed amounts on the 1098-T.