Scholarship treated as income

[poolcleaner]

I give up!!! Countless hours trying to prevent Form 8863 from making the client's scholarship as taxable income.  Client is working toward a doctorate, more than half time student, and qualifies in all ways to have a tax free scholarship. I have poured over Intuit's instructions for filling out Form 8863 with no help there.  The main possibility for error is that in entering the information from Form 1098-T, I should adjust line 1 to include the scholarship number along with the amounts actually paid by the taxpayer.  Is this the answer?  If not, what is?

Another Former All Star

[dkh]

Student Info Worksheet, Part V, Line 7   ?????

[poolcleaner]

I had tried that and it told me a lot of other lines were incorrect.  Putting the total of amounts paid by taxpayer and those in scholarships (line 5 of 1098-T) on Line 6 of Part V, at least the taxable income disappeared! Still no credit allowed but that may be better than paying taxes on the scholarship!

[rbynaker]

1098-T forms are notoriously wrong.  If the tuition that was paid by the scholarship is not included in box 1 (like it should be) you'll have to enter QHEE elsewhere (see dkh's instructions).  I would have the client get a financial transcript from the school for all of 2022 and into 2023 (sometimes there are refunds and the rule on education credits is anything refunded before filing the return gets adjusted before you file, anything after you file is a potential credit recapture the following year.)

Some of the transcripts are so convoluted that I can only survive them by making a spreadsheet.  Here's a charge, here's a refund, here's another charge, here's a prorate, here's a payment, here's a loan, here's a scholarship/grant, etc. etc.

[TaxGuyBill]

Box 1 of the 1098-T is higher than Box 5?

Did you check the box on the Student sheet saying they are working towards a degree?

Is the taxpayer able to be claimed as a dependent?

[poolcleaner]

Box 1 is lower than Box 5.

Definitely working toward a degree and is now Dr. Client.

Not a dependent.

Thanks, Bill.

[TaxGuyBill]

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@poolcleaner wrote:

Box 1 is lower than Box 5.

Definitely working toward a degree and is now Dr. Client.

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If box 1 is correct (but as Rick said, you should check that), then the difference between Box 5 and Box 1 SHOULD be taxable.  Or are you saying it is taxing ALL of Box 5?

Did you check the box on the Student worksheet that he is working towards a degree?  And double check the general Info worksheet that you indicated that he can not be claimed as a dependent?

[poolcleaner]

Rick, this is the most organized family ever so I know exactly how much was paid and when including a payment in 2021 that was required in December 2021 but not included on the form. I had tried following the ProSeries instructions but that created a lot of contradictions.  I'm about to live with the entry on Line 6 of Part V since it is a correct number but is not coming from the school and it does seem to remove the income issue.  This is the end of the doctorate so other years have all shown a much higher number for payments than the number for scholarships so the issue did not arise.

[poolcleaner]

Yes, I did all of those things but the scholarship is definitely not taxable income according to the IRS.

[TaxGuyBill]

Oh, I just realized that this was you poolcleaner.  😀  I've missed you!

Why is the scholarship not supposed to be taxable?  Generally, scholarships in excess of tuition would be taxable, so why is this not taxable?

[poolcleaner]

It is definitely not in excess of tuition, it just looks that way on the 1098-T.  There are a few other odd parts to it but adding the scholarship and the amount my client paid would be the total amount of tuition for the year.  There was nothing involved but tuition in this case.  The IRS worksheet is very logical.  

[qbteachmt]

Did your Dr Client hit the phase out limit?

[poolcleaner]

No, she will in a year or two but not so far!

[fredr · Accepted solution]

leave box box 1. and box 5 as reported on 1098t. then go down on 1098t work sheet to reconciliation of box 1 payments line b. put the actual tuition paid with scholarship and taxpayer money on this line and it takes care of your problem.

[Judy A]

Before taxing the difference of box 5 scholarship income over the tuition box 1.... Watch box 7 from prior year and current year if checked.  there is always a timing issue with these forms.  Trust the program on if it is taxable or not.  That is unless you have other fees to add.