Taxable Scholarship

[Burke]

Ok. I have a 1098T which shows $4K+ in Box 2 and $8K+ in Box 6, scholarships & grants. Awaiting detail report from university as to actual amounts paid and scholarship info credits. Assuming this is taxable, Pub 970 says to put on Line 7 (wages). Parent has always claimed AOC credit as daughter is dependent on tax return. Does the parent claim this taxable income? Or does it go on the daughter's return? The 1098T is under the daughter's SSN. Should daughter claim herself and report income?

[RitaB]

Excess

The taxable scholarship goes on daughter's return. I can't say whether daughter should claim her own exemption, I doubt it, but I don't know enough about everybody's income and daughter's support to say, just figure that out as you normally would.

[FEDUKE404]

Goes to student

If there is taxable income from scholarship > qualified expenses, that income definitely belongs to the student and is reported on line 7 of Form 1040 as mentioned. (Your software should also place on line 7 the annotation "SCH 4000" or whatever dollar amount ends up being taxable and included in whatever amount is shown for line 7 of Form 1040, such as if student also had some W2 work income to report.)

What you need to be careful of is crossover from one year to another. For instance, if the student really had $4k of qualifying expenses each semester AND $4k of scholarship each semester, there would be no taxable income nor education credit. It is quite possible the Form 1098-T was showing a different time period than the "scholarship" period, especially if the scholarship funds were delayed from December to January of the next year.

You will just have to get the REAL facts and figure it out all.

As for the parents "always claimed AOC" they might have a problem if there remained zero qualifying expenses after they were reduced by scholarships received. . . .

FE

[Burke]

What you need to be careful of is crossover from one year to another. For instance, if the student really had $4k of qualifying expenses each semester AND $4k of scholarship each semester, there would be no taxable income nor education credit. It is quite possible the Form 1098-T was showing a different time period than the "scholarship" period, especially if the scholarship funds were delayed from December to January of the next year. You will just have to get the REAL facts and figure it out all.
FE

Exactly my thoughts. That's why I want a print out from the university. She had $15K+ of tuition in 2011, and only $5K+ of scholarships on the 1098T. And she does have to file a tax return for 2012 due to job and investment income. So the bite from the 2012 taxable scholarship (if any) will not be terribly bad. If it goes on Line 7, then her standard deduction compensates somewhat. I can't believe I have not run into this before, but it is the first one I have gotten.

Now, here is another thought. This is her final year, she graduates in 2013, so concievably will have tuition expense next year. Since she will not be getting an AOC credit this year -- neither the parent nor the child -- does that mean she will not have rec'd it for the "four years" limitation for the credit, and could possibly take one in 2013?

Don't understand why, but the IRS is questioning the AOC credit on 2010 (on the parent's return.) 1098T for that year shows $15K+ of tuition billed and NO scholarships received. They didn't question 2009. I do the parents' return as well, so there were no issues about them claiming it this year. I am holding both returns until this is resolved.

[FEDUKE404]

Supports my contention

...Now, here is another thought. This is her final year, she graduates in 2013, so concievably will have tuition expense next year. Since she will not be getting an AOC credit this year -- neither the parent nor the child -- does that mean she will not have rec'd it for the "four years" limitation for the credit, and could possibly take one in 2013?

Don't understand why, but the IRS is questioning the AOC credit on 2010 (on the parent's return.) 1098T shows $15K+ of tuition billed and NO scholarships received. They didn't question 2009. I do their return as well, so there were no issues about them claiming it this year. I am holding both returns until this is resolved.

This is consistent with the problem I mentioned previously.

Daughter of client was a freshman starting in fall of 2010, and received a fixed scholarship each semester in the amount of $5k.

The 2010 Form 1098-T showed two semesters of qualifying expenses (Fall 2010 and Spring 2011). That same Form 1098-T showed ZERO scholarship income. School explained funds for scholarship were actually received in January 2011 (for fall 2010 semester) and in May 2011 (for spring 2011 semester), and thus the $10k of scholarships .... for freshman year .... did not show up until the arrival of the 2011 Form 1098-T. (The parent had paid the bill for both semesters taking into consideration the $5k/semester scholarship.)

Being careful, the tax returns were prepared by taking the PAID qualifying expenses and reducing same by the $5k/semester scholarship. All was well. Anyone who works merely from the Form 1098-T....is looking at a major problem or two!

For the interim years, the "numbers" accidentally work out, so long as the scholarship remains constant.

And, of course, in the senior year, with the same facts in place, you face the significant potential of receiving a Form 1098-T with ZERO qualifying expenses but with $10k of scholarships reported.

In answer to your question about the "four years," this situation would have resulted in only four AOC scenarios, so all is well. Had the student gone on to grad school, then you need to be sure you have all of the real facts available.

Yeah.....it's a real mess!!

FE