Scholarships and Education Credits

posted Nov 30, 2012, 3:14 PM by Wayne Culp   [ updated Nov 30, 2012, 3:14 PM by Wayne Culp ]
A good summary guide is Pub 4012 page 13-1 (near the end of the spiral manual).
The student's Form 1098T:
1. Check for scholarship income,  If box 5 is larger than either box 1 or box 2, then there is a good chance there will be scholarship income for the STUDENT.  Open Pub 4012 page D-3 and/or the Pub 970 Chapter 1 to help determine Scholarship Income.  
  • The scholarship amount in box 5 should be reduced by the "Tax free" amounts designated on thePub 4012 page D-3 chart.  
  • Check the footnotes for Fees, Books, Supplies, & Equipment.  
  • Most colleges do NOT require computers or other electronics for enrollment or attendance.  
  • The chart in the Pub 970 Chapter 1 might be useful.  
  • There are also "tax-free scholarships and fellowships" so be careful.  
  • Regardless, if the student is a dependent or not, they are the one responsible to report Scholarship income on Line 7 of the Form 1040 (in Tax-Wise, entered through a link to 1040 Wkt 1).  
  • If there is scholarship income and there are no "qualified tuition and related expense" payments (cash or check to the school) by the student or the parents, then there generally is scholarship income.

2. Determine if there is any opportunity for a tuition and fees deduction on Form 1040 line 34 (Form 8917) or one of the Education Credits on Form 1040 Line 49 (Form 8863).  A taxpayer can only take ONE, so the preparer should work both methods to see which generates the lowest  tax owed or highest refund.  The student's From 1098T, box 1 is a starting point.  For further expense the taxpayer should other documentation of the cost (checks or receipts for books).
  • Pub 4012 page E-3 for the tuition income deduction (1040 page 1)
  • Pub 4012 page G-4 for the education credits (Form 1040 page 2)
  • Checkout between both options to determine who can get the adjustment for tuition or the education credit.
  • Determine the "qualified tuition and related expenses" that qualify.  Another guide is Pub 4012 page 13-1.