I have come across Form 1098-T wherein amount in Box 5 exceeds amount in Box 1 by $2,500.
Should the excess be treated as a taxable income? Or should I ignore entering anything on the tax return.
Assuming the numbers on the 1098-T are correct (which is not always the case), yes, the excess scholarships are taxable to the student.
Are you preparing the parents' tax return or the student? Does the student qualify as a dependent?
Then if you fill out the 1098-T worksheet, the program should automatically put the taxable amount on Line 1 of Form 1040.
Other things to consider:
- Just because he earned $30,000 doesn't necessarily means he is not a dependent (although it seems likely you are correct, he probably is not). If he still lives with parents and is a full-time student under age 24, you should figure out who paid for support. If college was really expensive, the might not have paid for over 1/2 of his own support (scholarships are NOT considered as him paying for his support).
- If he is a full time student under age 24 and if he did NOT pay for over 1/2 of his own support with EARNED income, then the Kiddie Tax might apply.
- If 4 years of the American Opportunity Credit has not been used, it MIGHT be a consideration to intentionally make $2000-$4000 MORE of the scholarship taxable (assuming the scholarships allow for it). That would allow him to claim the American Opportunity Credit (assuming he were to meet all of the other requirements).
Let me give you a pointwise reply:
1. He was just over 24 years of age at 12/31/2020. He does live with mom and brothers, but none of them make any contributions towards his education.
2. He is marked as a part-time student on 1098-T, and over age 24 as mentioned in point 1 above.
3. I did not fully understand this point.
Given the situation above in point no. 1 and 2, can he still be a dependent? If not, is there any way I can save him taxes this year, or should I just go ahead and show the difference between Box 5 and Box 1 as his taxable income for the year?
Really appreciate your response.
You are correct that he is not a dependent.
As for point #3, was 4 years of the American Opportunity Credit taken for him (most likely by his parents)? Does he meet the other requirements for the American Opportunity Credit (such as being an undergraduate)?
His parents' tax returns would need to be checked if they claimed the American Opportunity in the past or not (and how many times).
For scholarships allow you to do this:
If there is enough tuition and scholarships, rather than claiming $2500 as excess scholarships, you can claim $4500 (or $6500) as excess scholarships.
That would allow $2000 (or $4000) of tuition to be used for the American Opportunity Credit . The result would be a $2000 (or $2500) tax credit. The tax credit would save much more in tax than the extra income tax on the excess scholarships.
I have confirmed that no American Opportunity credit was claimed in the past for this student. I have also attached a snip of his 2020 1098-T.
I do see some potential tax savings here (or refund in this case).
What do you recommend how should I go about with his filing?
Assuming the scholarships are allowed to be used for non-tuition, you would want to make the entire $4546 to be taxable. That would allow all of the tuition to qualify for the American Opportunity Credit.
I don't specifically remember how to do it on the tuition worksheet, but if you tinker around with it you can make all $4546 taxable.