TP is nondependent student with taxable scholarships and grants

[Love2Cruise]

TP is full time student and not a dependent of her parents or anyone. Her earned income is about $4500. TP received a 1098-T with $5036.99 in box 1 and $24,330.00 in box 5. She states that any excess, or refunds she receives, is used towards the next semesters tuition or qualified expenses. The students account detail shows only one semester (fall) being billed to the students account, because the university included spring semester of 2022 on the 2021 1098-T. As a result, the student has taxable income on the excess between box 1 and 5. As a result of the excess, she's not allowed any of the education credits. Is there a work around for this or is the poor child on the hook to pay taxes of over $1K on the excess. 

Any suggestions or direction would be greatly appreciated. 

Thank you.

[TaxGuyBill]

If I remember correctly, you are allowed to offset the scholarships with all of the tuition for the year, even if some of it was reported on the prior year 1098-T. 

Just be sure to document things in case of an IRS notice (and warn the taxpayer of a potential IRA notice).

However, because you are doing that, you may also need to look at the prior year.  If you are applying the 2022 scholarships to the spring 2022 semester (which was reported on the 2021 1098-T), you may need to look at if any credits or taxable scholarships would be affected on the 2021 tax return.

[Love2Cruise]

Thank you for your input. I'm afraid that is the case, and any offset will result in in amended return for 2021. Sighhhh!!! My heart breaks for her.

[BobKamman]

How was the $24,000 spent?  Did it go for nonqualified expenses, like room and board?  I'm trying to follow the examples in Pub 970, which indicate that sometimes you can say the funds were not spent on tuition, so they are still eligible for the credit.  But I haven't had to work with a 1098-T situation lately.  

[BobKamman]

How is your situation different from this example in Pub 970?

Example 2. The facts are the same as in Example 1, except that Joan reports the entire scholarship as income on the tax return. Because Joan reported the entire $2,000 scholarship as income, the qualified education expenses don't need to be reduced. Joan is treated as having paid $3,000 in qualified education expenses.

Doesn't this mean that if she chooses not to use the scholarship exclusion, she can claim the AOC?  Isn't $2,500 better than 10% tax on $5,037?

[Love2Cruise]

No difference: this seems to be the same situation. So, to do it using the example in Pub 970, how would I enter it in order to report the $24K as expenses? Do I enter it as "Other Wages Not on a W-2", and not report the 1098? I had her send me a copy of her student account to see if I could reconcile the amounts billed for qualified expenses and amounts received for scholarships and grants to the 1098T. I honestly have no idea what accounting method the school uses, but the bill and credit dates for the pertaining year, do not reconcile with the 1098T. Tax Guy's suggestion to make the adjustment to the tuition amount and including an explanation reduces the liability to half the amount originally owed.

[Love2Cruise]

But it's not earned income. Does that make a difference?

[Love2Cruise]

Entering the entire scholarship & grant amount as earned income, allowed for the AOC and resulted in a refund. If we're interpreting the example correctly, that's a win for my TP student. However, we know our interpretation of IRS rules and their interpretation may be on two different levels. 🤔 I just want to make sure I'm recording it in the correct place. Any thoughts?

[Love2Cruise]

Hey Bob,

Just checking to see if you saw my last two responses. Would sure feel better if you give me your thoughts on how I reported the tuition.

Thanks so much for your input and assistance. 

Warm regards!

[dkh]

@Love2Cruise    helpful tip    use @BobKamman  when you want the attention of someone in a post.   

It sends them a notification they've been mentioned in a post so they're more likely to respond.

Have a great day!

[BobKamman]

I haven't done a return this year with tuition tax credits -- all my clients are perfect so their kids get full-ride scholarships, and the one client who went to school herself made $200K while doing it, so was priced out.  I would have to do a dummy return to picture the problem, and I have too many dummies to finish returns for, already. 

[Love2Cruise]

@BobKamman  😂 I totally understand and get it. In the same boat, but maybe not with dummies, but too many returns to have to keep circling back to this one. Best wishes to you for the next two weeks. 

[Love2Cruise]

Hi @dkh! Thanks for the tip.  Very much appreciated!!!

Have a great evening!