I suspect a lot of 1098-T forms are going to be screwed up this year (even more than usual). See instructions:
Bottom of page 3 (emphasis mine):
Box 1. Payments Received for Qualified Tuition and Related Expenses
Enter the total amount of payments received for qualified tuition and related expenses from all sources during the calendar year. The amount reported is the total amount of payments received less any reimbursements or refunds made during the calendar year that relate to the payments received for qualified tuition and related expenses during the same calendar year. The amount reported is not reduced by scholarships and grants reported in box 5. Include in this box the receipt of a payment of past-due qualified tuition or related expenses from a previous calendar year, but only if the educational institution previously billed the student for such amount(s).
When we calculate the credit, we subtract Box 5 from Box 1 to determine the amount that is potentially eligible for credits.
Yes, per the 1098-T instructions, box 1 (of the 1098-T) should include amounts paid by scholarships.
What you use to determine education credits is a completely different question. The total amount paid IS reduced by scholarships (so box 1 minus box 5) when computing credits. There are some exceptions, such as when the scholarship can be properly allocated to non-qualifying expenses (room & board, etc.) In some cases it can be more beneficial to treat the scholarship as taxable income (to the student) while taking the AOTC on the parents return. See Pub 970:
The terms of the scholarship dictate how it is allowed to be spent, you can't just arbitrarily make stuff up.
Edit: Adjustments to QEE start at the bottom of page 14 of Pub 970.
I just want to confirm my understanding, as I have now spent several hours researching this topic. I am not a professional tax preparer but have been filing my own returns for my entire adult life, and this 2019 US 1040 will include my fourth child's Education Credits or Deductions.
Her 1098-T Box 1 shows payments we personally made plus student loans in the amount of $12,791.
Her 1098-T Box 5 shows Scholarships or grants in the amount of $15,175. This is correct.
Subtracting Box 5 from this Box 1 amount would be negative, requiring reporting the differential as taxable income. However, tuition itself was over $20K, so how could this be possible? So I thought, hmmm...I am not sure about the calculation of this Box 1 amount, thinking it should be the total charges posted and received for the semester, including the amount covered by the scholarships. Is this correct? I did find the following Reminder near the beginning of Publication 970.
Form 1098-T, Tuition Statement. When figuring an education credit, use only the amounts you paid and are deemed to have paid during the tax year for qualified education expenses. In most cases, the student should receive Form 1098-T from the eligible educational institution by January 31, 2020. However, the amount on Form 1098-T might be different from the amount you actually paid and are deemed to have paid.
So I am interpreting that Scholarships posted toward charges are amounts "deemed to have paid."
Please confirm and clarify if necessary. I do not want to get myself into hot water with the IRS!
Are you using ProSeries, from Intuit, to prepare your taxes? This is a peer user community for using that software.
It isn't a forum for general tax guidance. The TurboTax Community is a better place for that type of question (of course, they would assume you are using TurboTax):
"Level Up" is a gaming function, not a real life function.
I agree with you 100%. Everything I read online says or implies that if box 5 exceeds box 1 then you have taxable income. Say someone has a 100% tuition scholarship. In that case there would never be a box 1 amount and box 5 would be the annual tuition. That makes no sense (dangerous words). I also noticed the "deemed" wording. However, I could not track down a definition of "deemed". The other argument in favor of your conclusion is the definition of a non-taxable scholarship (IRS website Tax Topic 421):
If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:
- You're a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
- The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.
Per Pub 970: Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are expenses for:
• Tuition and fees required to enroll at or attend an eligible educational institution; and
• Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
Lastly, worksheet 1 in Pub 970 does not reference form 1098T. It only refers to Scholarships and Qualified educations expenses. Nowhere in this section of publication 970 or on the worksheet does it say "amounts paid" when referencing qualified education expenses.
I have a similar situation as yours with my daughter. My initial approach was to bite the bullet and report the excess of box 5 over 1 as income (and Box 1 was an incorrect amount). But the scholarship could only be used for tuition i.e. a qualified education expense. Therefore, it meets the definition of tax-free. I will consider the scholarship non-taxable. This may require some adjustments when reporting the 1098T in different tax software programs.
If you're looking at a 2018 form 1098-T with a box 2 amount, then a "reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete." And you're required under due diligence standards to get additional information.
Just my $0.02.
Please note that @corinnerichard has asked Twice, and the new topic is here:
That's one reason it helps not to ask your own question inside of an older topic by a different person.
"Level Up" is a gaming function, not a real life function.
In my case 2019 1098t has box 1 is blank because the university billed in December 2018 but got payment if January 2019. If you use the box 5 minus box 1 the entire scholarship is taxable. When I went into forms mode there was a section for box 1 adjustments where I entered the payment received amount which took care of the tax issue. It seems if the billing was done in 2018 (December) it does not generate information for Box 1 and was told that this was an IRS change to the schools (revenue recognition, etc). I have not confirmed if is this is the correct way so reaching out for verification. My documentation is from the actual invoice.