Tax Free Scholarship or Grant treated as income rather than on 1040 EdExp Tab

[Chowdahead]

Something new this year that I am seeing as a blue informational message when running error check is in the 1040 EdExp Tab.  Client received a 1098-T with $1,500 in Box 5 Scholarships or grants.  This reduces the otherwise amount i Box 1: Payments received.

The blue message indicates "It may be more beneficial to choose to include tax-free scholarships or grants as income rather than allocate some to be tax-free."

When I include the Scholarships amount on the 1040 under "Other Income" instead of on the 1040 EdExpTab, the client's tax obviously goes up but the refund goes up because the Lifetime Learning Credit increases due to not the scholarship income not reducing the amounts paid on the 1098-T.

For some reason this does not seem correct, or am I interpreting this message wrong?

 

[EricF]

There was a Tax Adviser article on this subject last year, and in the examples they used, the scholarship income was included in the student's income, not the parents'.  That can be an even better answer.

[gfizer]

1 hour ago, Chowdahead said:

Something new this year that I am seeing as a blue informational message when running error check is in the 1040 EdExp Tab.  Client received a 1098-T with $1,500 in Box 5 Scholarships or grants.  This reduces the otherwise amount i Box 1: Payments received.

The blue message indicates "It may be more beneficial to choose to include tax-free scholarships or grants as income rather than allocate some to be tax-free."

When I include the Scholarships amount on the 1040 under "Other Income" instead of on the 1040 EdExpTab, the client's tax obviously goes up but the refund goes up because the Lifetime Learning Credit increases due to not the scholarship income not reducing the amounts paid on the 1098-T.

For some reason this does not seem correct, or am I interpreting this message wrong?

 

 

It is actually correct

From the Form 8863 instructions:

"Tax-free educational assistance.

For tax-free educational assistance received in 2018, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. See Academic period, earlier. Tax-free educational assistance includes: 1. The tax-free part of any scholarship or fellowship grant (including Pell grants); 2. The tax-free part of any employer-provided educational assistance; 3. Veterans' educational assistance; and 4. Any other educational assistance that is excludable from gross income (tax free), other than as a gift, bequest, devise, or inheritance.

TIP: You may be able to increase the combined value of an education credit if the student includes some or all of a scholarship or fellowship grant in income in the year it is received. [emphasis added]

Generally, any scholarship or fellowship grant is treated as tax-free educational assistance. However, a scholarship or fellowship grant isn't treated as tax-free educational assistance to the extent the student includes it in gross income (the student may or may not be required to file a tax return) for the year the scholarship or fellowship grant is received and either: • The scholarship or fellowship grant (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses, or • The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses.  [emphasis added]"

[Chowdahead]

On 1/23/2019 at 4:09 PM, gfizer said:

 

It is actually correct

From the Form 8863 instructions:

"Tax-free educational assistance.

For tax-free educational assistance received in 2018, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. See Academic period, earlier. Tax-free educational assistance includes: 1. The tax-free part of any scholarship or fellowship grant (including Pell grants); 2. The tax-free part of any employer-provided educational assistance; 3. Veterans' educational assistance; and 4. Any other educational assistance that is excludable from gross income (tax free), other than as a gift, bequest, devise, or inheritance.

TIP: You may be able to increase the combined value of an education credit if the student includes some or all of a scholarship or fellowship grant in income in the year it is received. [emphasis added]

Generally, any scholarship or fellowship grant is treated as tax-free educational assistance. However, a scholarship or fellowship grant isn't treated as tax-free educational assistance to the extent the student includes it in gross income (the student may or may not be required to file a tax return) for the year the scholarship or fellowship grant is received and either: • The scholarship or fellowship grant (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses, or • The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses.  [emphasis added]"

Thanks a bunch!