This is probably a bad question and I have no idea if it’s legal, possible, or reasonable. But…
I have a full ride scholarship for my 4 years starting this fall. For TY 2018 I will fall below the standard deduction and won’t need to pay income taxes (I will have to pay SE taxes for my stipend income). For TY 2019 and beyond, I will have about $10k of non-QEE (i.e. R&B) plus about $7k stipend income plus hopefully $2k other earned income, so I’ll have about $7k of taxable income. So for TY 2019, I would have SE tax plus the kiddie tax of $1323 (first $2550 at 10% and the rest at 24% per the 2018 rates for trusts and estates).
The university will issue a 1098-T with boxes 1 and 5 filled out. Box 5 will either have the full scholarship amount or the amount of scholarship in excess of QTRE (definitely one of them, but the university doesn’t know yet), and Box 1 will have the amount paid by the student. Normally, box 1 will have “0” for students with full ride scholarships. FYI, the university will not consider books QTRE.
Suppose I paid $2000 of the university’s QTRE from my bank account, which would result in a $2000 refund. Would that $2000 paid by me count as AOTC? Of course, the $2000 refund would then be added on to the rest of taxable scholarship income, but since even the kiddie tax rates are not 100%, it would result in some saving come tax time. Basically - it would mean SE tax plus the kiddie tax of $1803 (first $2550 at 10% and the rest at 24% per the 2018 rates for trusts and estates) minus $2k, which would leave me with less tax than without paying that.
Nope. You can claim gift aid income as taxable in order to pay OOP for QEE and then take the AOTC, BUT that assumes that there was still a bill to pay with either your own funds or loans. In your scenario there is no bill and no OOP expense anywhere.
Box 5 is supposed to show the total of all scholarships or grants administered and processed by the university.
Book expenses are not shown on the 1098-T because it’s not a direct-billed expense; generally the school does not know how much you spent on books or where the books were purchased. Besides, whether or not the university considers books to be QTRE is irrelevant; what matters is whether the expense for books meets the IRS definition. Books and other supplies that are required course materials are definitely a qualified education expense.
It occurred to me that I can’t claim AOTC anyway as I will still be a dependent.
@BelknapPoint So… how does one substantiate the amount of the scholarship that is non-taxable if box 1 shows 0 and box 5 shows the full scholarship amount?
If you need to substantiate the amount of the scholarship that is non-taxable, you can provide a billing statement from the school that shows the qualified education expenses charged (tuition, certain mandatory fees), and you can show receipts for required course materials that you purchased (books, etc.).
To anyone who is used to these situations regarding taxable scholarships - do your returns normally get accepted with whatever amount you put in? (I’m going to be honest on my return, I’m just worried about getting audited/pestered with Request to Pay letters anyway.)
The university may not even issue a 1098T for me - since all qualified tuition and related expenses will be covered by the scholarship. I still am responsible for paying tax on my taxable scholarship amount even if they don’t, right? How does the IRS figure out if the amount I say I got in taxable scholarships is correct?
Well, they also won’t qualify if I can’t try to pay OOP and then get extra scholarship money. Also, although they’d be supporting me fully if I lived at home (my uni is in town), which normally would come out to well over $1.5k/semester, they are unwilling to pay tax due to “free” R&B because they don’t think I will owe tax on that portion of the scholarship no matter what I show them.
If you convince them that your scholarship amount in excess of qualified education expenses is taxable, are you expecting your parents to pay the tax owed?
Well, they also won't qualify if I can't try to pay OOP and then get extra scholarship money.<<
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Your parents would qualify for AOTC based on their claiming you as a dependent, their income (if married, under $180k). To make it beneficial for them to take the credit, they’d need some taxable income to get the full $2500 credit, or $1000 is a refundable credit.
If you aren’t dependent on them and file as an independent, you can take the AOTC but only to offset taxes owed. I don’t think any of it is refundable to a non-dependent taxpayer.
It would be nice and perfectly reasonable if they did, as they’ve paid housing costs for my other siblings until they were much older than 17/18 (one until she was 20 and another until 25) and IMO taxes on R&B scholarship are essentially reduced housing costs. Still, it’s my scholarship so I have the responsibility.
@twoinanddone My parents’ income isn’t the issue for AOTC (they are joint filers below $160k). However, my scholarship will entirely cover QEE, in addition to R&B. So I won’t qualify for AOTC.