Useful info for 1098-T

mcat2
Mon, 28 Mar 2016 07:49:02 +0000

Tax season is near. I was asked by a friend about this and looked up this seemingly useful info. I cut-and-pasted what I had found in case it is of use to someone here. (no guarantee about its correctness though. Use this info at your own risk.)

A few more answers to your questions: The 1098-T isn’t one of those tax forms that’s really compared like a W-2 - it’s more informational. If you have solid records of your own allocation that make sense, you are allowed (and it’s common) to place expenses and scholarships in different periods versus the 1098-T info. Just make sure you know exactly how you’ve treated everything from year to year, so you’re not double counting anything. Usually, Box 7 on your 1098-T will be checked, signaling to the IRS that there are timing differences across years, thus they may be treated differently than reported by the taxpayer.

Any taxable scholarship income is your daughter’s income: She’ll likely meet the filing requirement threshold and require her own tax return. If she meets dependency requirements for your return, she’ll only have a standard deduction and not her own personal exemption. I find that many taxpayers become confused over standard deduction and personal/dependency exemption. They’re two completely separate things. She can be your dependent, but she still has to report her income (i.e., she claims her income, but she doesn’t claim herself). The education tax credit follows the dependency. Per your comments, looks like you claim her as dependent, and therefore the AOTC goes on your return. Your daughter then files her own tax return, claiming the scholarship income, any other income, and a standard deduction, but no personal exemption.

It’s my understanding that there are new rules in place, classifying scholarship income as unearned income. This might be bad news for you, and could potentially trigger the kiddie tax, taxing the scholarship income at the highest marginal parent tax bracket. I don’t know as much about this, because the rule change came after I learned about all this.

My advice is to try this both ways and see what the net effect is (parent return plus daughter’s return). In order to allocate some scholarship funds as being used for non-qualifying expenditures, thus freeing up that money to use for the AOTC, you have to meet two tests. #1) The scholarship cannot specifically state it’s supposed to be used for tuition. If it specifically states it’s to be used for something, it must be allocated to that purpsose. In my experience, most scholarships don’t specifically state they MUST be used for tuition or books, so usually you can allocate as you like (but not always!). #2) Scholarships received cannot be greater than COA (published cost of attendance for the academic year). Easiest way to explain is an example: Say tuition at X University is $1K, COA is $10K, and your daughter received $11K in scholarships. You allocate $9K to non-qualifying expenses like room and board, but you still have $2K left to allocate, and when you do, you have to allocate it to qualifying expenses, leaving nothing left as eligible to use for an education credit. You can’t allocate any amounts greater than the listed COA. Obviously, this is much more possible at an inexpensive public university, and much less possible at an expensive private school. I’m assuming you know what official COA is, google it if you don’t, it’s a number published every year by every university, and includes food, housing, transportation, and incidentals.

Also a few caveats… Not all CPA’s are familiar to this level of detail. It’s actually pretty rare to see major scholarships like this, so they have no reason 95% of the time to do anything other than a simple mathematical operation (qualifying expenses - scholarships = amt to use for AOTC calculation). Allocating costs is completely allowable, but that doesn’t mean it’s something CPA’s see often or are very experienced with. College Confidential regularly has threads on this subject, with much more detail and discussion if you want to read more. Also, most tax software isn’t specifically set up for this allocation, or doesn’t ask the right questions for anything other than the simple mathematical operation from an entered 1098-T. You have to play with all the boxes in the tax software to get it to come out properly, and you need some level of knowledge about how it should come out on a 1040 to make it happen.

Good luck, I spent many many hours researching this exact issue a couple of years ago, when I was a broke, 30-something, second career college student. That tax credit was big money to me, but I wanted to make sure this stuff was legit, and it is, with top notch record keeping and enough knowledge to do it correctly without mistakes.