In May 2016 my daughter graduated from a 4-yr college in 2016. In January of 2016 we rec’d a 2015 1098-T that covered the usual expenses and box 5 scholarships and grants which I included in my taxes and rec’d a small tax credit. My daughter was dependent for that tax year. We thought that was the end of it, and it should have been. This year, however, we received another 1098-T for an outside scholarship that was paid to the school after they had issued the 2015 1098-T for spring semester 2016. Rather than letting us know last year so we could ask for a corrected 2015 1098-T, they just waited a year and issued a 2016 1098-T with nothing on it except the $500 scholarship in box 5. My daughter is no longer a dependent like she was during the previous tax filing period. What should we do? Do I need to ask for a corrected 2015 and refile my taxes from last year? Do I have my daughter put the scholarship on line 7 of her taxes as SCH $500? Any thoughts would be greatly appreciated.
Scholarships that are used to pay tuition are not taxable.
Assuming that $500 went to her tuition and wasn’t refunded to her, I don’t think you need to do anything with it.
If you are claiming an education tax credit for 2016 then you reduce the qualified education expenses by the $500 scholarship.
Or your D can include it in her income as taxable scholarship for 2016.
Did she have book expenses for the spring 2016 semester?
^adding to the above, scholarships that pay for tuition, qualified fees and books are not taxable.
But you can’t claim an education credit and get tax-free treatment of scholarship for the same qualified education expenses.
See IRS publication 970
There is no mistake to be corrected. That scholarship was disbursed (applied to the account) in 2016, that’s why it was reported on a 2016 1098-T.
All of the above commenters point out the various considerations. The final answer depends partly on what you claimed on your 2015 tax return, how much aid she received, cost of attendance, etc. The simplest solution would be if there are leftover qualified expenses (tuiton & fees) from 2015 that can be matched up with the scholarship, rendering it nontaxable. Or did she buy any books for Spring 2016 that were paid for in 2016?
Thank you everybody for your thoughtful responses. We will have our daughter put the scholarship on her tax return since she is no longer a dependent. She doesn’t have leftover qualified expenses, so she’ll pay the tax. Thanks again!
remember that it’s only taxable if the total scholarships exceeded the qualified tuition expenses for the year (in other words, if she had a full-tuition scholarship + the $500).
The OP said there was no QEE for spring 2016 - that all tuition and fees were paid in 2015. That can happen for spring senior year if everything for spring was always shifted to the previous tax year.
She’s put $500 in extra income on the tax form. No big deal. She probably is in a lower tax bracket as a new worker with only 6 months of income since she was a student for the spring (10% bracket is only $50, and that’s after the ~$10k exemption/standard deduction). Or, if she actually is a high income worker in a higher bracket, she can afford to pay the taxes on the free scholarship.
My daughter paid taxes on about $15k in scholarships last year, and her entire tax was only about $750 after her standard deduction. Still a great deal.