<p>A couple of clarifications. Books can not be counted as qualified expenses on the parents’ taxes, but they can be taken off of the student’s scholarship income if they have to file. Regular books can be purchased anywhere (amazon, ebay, etc) and unless the school requires that you buy them at their bookstore, they are not qualified expenses. From what I remember reading, if your student gets a full ride, you may not get a 1098 T form, and I don’t think you have to pay taxes on it either. Not positive though!
Now if you are using a tax prep software ( I use Turbo Tax Premium), and you enter the figures from box 2 and box 5, you will then be asked what other qualified expenses you paid. My son has tuition and room and board, but we pay the fees, which are a few thousand dollars. At first it had me ineligible for lifetime learning and the tuition deductions (no Hope credit because of 3rd year) because it was automatically counting all of his scholarship money for the qualified tuition expenses in box 2. The school tells me that we pay the fees and it bills me exactly for the total of the general fees and technology fees which are qualified expenses. I had to recall how to show that I did pay qualified expenses out of my pocket.
This is my third year doing this, and even though I make notes to myself every year on how to calculate it right, I still get a headache and spend hours until the lightbulb comes on again! But I will give you this scenario to show you as simply as I can…
Box 2 amts. billed for qualified expenses 28,000
Box 5 scholarships/grants 33,000
Parents expenses that were qualified (fees): 3,000
At first it appears that there is an overage of $5000 that the student will have to report as income and the parent gets no deduction because the scholarship covered all of the qualified expenses. And I guess you could file it that way and pay the taxes on the $5000 for your student if they had to file. Whether they have to file or not also affects all of this, because they would not owe anything if that was their only income since the standard deduction for a single dependent person who is claimed on someone else’s taxes is $5350. If they have a summer job or school job or any outside scholarships, that would all be added as additional income.
But for most people, the parent getting to claim the credit, especially the Hope or LL, or the tuition and fees deduction, outweighs what the student tax is. So the above scenario can end up like this:
Box 2 Qualified tuition billed: you put in 25,000 instead of the 28,000 from box 2 because you subtract the $3000 that you paid for a qualified expense (you are entering the amount of tuition that the school charged for the year)
Box 5 remains the same–33,000
When asked if you paid qualified expenses, you put in the $3000–it will calculate if you are eligible for the credit or deduction and which is best in your situation
BUT NOW YOUR CHILD’s taxable income has increased from $5000 to $8000 because more of the scholarship is going toward room and board so his or her taxable income is not just the different between the 1098-T’s box 2 and 5, it is more… It is now the different between what YOU put in for box 2 and box 5 after you calculated the tuition.
Then you add any of their income and outside scholarships and you can subtract book expenses so you make sure they save the receipts.
Most of the time the credit or deduction will be better for the parent even though you may have to pay more in taxes on the student if they have to file, which my son does because of a campus job that is not work-study plus his summer employment.
The 1098-T I receive does not accurately reflect how his scholarship is appropriated but by doing the calculation as described, it is correct. His scholarship covers full tuition and full room and board, and we pay all fees. So he basically should legally be paying taxes on his full room and board, not a partial amt. as it appears on the 1098-T.
The amount I entered for turbo tax from box 2 when you subtract the $3000 is actually the exact cost of 2 semesters of tuition if you look at your break-down of charges on your college’s bill.
Confusing, yes! Already another headache trying to explain it. I hope it helps someone!!!
And remember, you are using a school year’s expenses (Fall 2008 - Spring 2009) if box 7 is checked (and most schools require payment for spring in December anyway) which is not our January-January fiscal year. But that will make it work out for the 4th year–you will have a fall and spring semester to count with your year’s worth of scholarship money. Sorry about the length of the post!</p>