High school senior received Form 1099 Misc with Box 7 checked (non-employee compensation) for a small scholarship received from an organization. From what I read, this is not how the organization should have reported the scholarship. In any event, when doing the student’s taxes with turbo tax, and by me specifically designating the income as Box 7 “other income” in the turbo tax interview questions and labeling it as a “scholarship”, (since she did not perform any service for it) turbo tax reports the scholarship on Form 1040, Schedule 1, line 21, as “other income, scholarship or fellowship from 1099 Misc”, which then loads the scholarship amount on lines 6 & 7 of Form 1040.
Two questions:
Is this the correct place to report this, or should the scholarship be reported as “wages” in line 1 of 1040 (even though student received a 1099misc)?
Turbo tax is not counting the scholarship amount as “earned income”, which I thought it was supposed to do, thus it is only giving her the $1050 standard deduction, rather than letting her add $350 to the scholarship amount as her deduction.
I assume this scholarship is taxable since she received it in 2018 but has not used it for any college expenses yet, since she a high school senior. And in 2019, she is likely to use it towards room and board, as she will receive a full tuition scholarship from the university she most likely will attend (if this makes any difference).
I have researched this to death and am completely confused. Can anyone give me some guidance? And please forgive me if I did not explain this well-enough. I am struggling to understand all of this.
According to IRS Pub 970, taxable scholarship amounts should be reported on Form 1040, line 1:
*How you report any taxable scholarship or fellowship grant income depends on which return you file.
Form 1040. If you file Form 1040, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1.*
It sounds like Turbo Tax is not doing what it should, although it’s hard to make this a definitive statement without knowing all the facts and circumstances. Concerning the standard deduction for dependents, IRS Pub 17 says the following:
*Earned income defined. Earned income is salaries, wages, tips, professional fees, and other amounts received as pay for work you actually perform.
For purposes of the standard deduction, earned income also includes any part of a taxable scholarship or fellowship grant. See Scholarships and fellowships in chapter 12 for more information on what qualifies as a scholarship or fellowship grant.*
A private company is not going to issue a 1098-T. Turbo tax is going to put Misc income on line 21 because that’s how you are entering it (as Misc income)
I don’t know if it is okay to enter it into turbotax as scholarship money and then not enter it as 1099-Misc. It would be amounts not reported on a 1098-T. I would. Turbo Tax will give you the extra standard deduction to cover the scholarship , up to $12000.
It would seem then that the correct thing to do is to enter the scholarship as W-2 wages on line 1 of the 1040; however, DD was issued a 1099misc. What are the repercussions/issues with entering this item as W-2 wages even though the organization has incorrectly issued a 1099 for it?
I think that turbo tax is counting any income entered as 1099misc, box 7, “other” income, as unearned income and not earned income when applying and calculating the standard deduction for dependents. I do not see a way to override this, if I enter the income as 1099, box 7, “other” income.
Also, should these non-education institutions be reporting scholarships on a W-2? As @twoinanddone stated, these organizations are not going to issue a 1098-T I wouldn’t think.
Thank you, by the way, for these detailed replies–they really help!
I found this in the instructions for the Form 1099-Misc. Unless I am misreading it, taxable scholarships in the case where they are not paid for teaching, research, or other services as a condition for receiving a grant, are not considered wages and do not have to be reported to the IRS by the organization giving the scholarship. Is this correct?
Snippets from page 2 of the Instructions for Form 1099-MISC (2019):
"Scholarships. Do not use Form 1099-MISC to report scholarship or fellowship grants. Scholarship or fellowship grants that are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant are considered wages and must be reported on Form W-2…
…Other taxable scholarship or fellowship payments (to a degree or nondegree candidate) do not have to be reported to the IRS on any form, unless section 6050S requires reporting of such amounts by an educational institution on Form 1098-T, Tuition Statement."
So, is it fair to say that the organization giving the scholarship in the limited circumstances of the scholarship not being given for services, etc., should not be reporting the scholarship to the IRS, even though the taxpayer may need to report in on his/her tax forms?
Also, from IRS Pub 970:
“Reporting Scholarships and Fellowship Grants; Whether you must report your scholarship or fellowship grant depends on whether you must file a return and whether any part of your scholarship or fellowship grant is taxable.If your only income is a completely tax-free scholarship or fellowship grant, you don’t have to file a tax return and no reporting is necessary. If all or part of your scholarship or fellowship grant is taxable and you are required to file a tax return, report the taxable amount as explained below. You must report the taxable amount whether or not you received a Form W-2. If you receive an incorrect Form W-2, ask the payer for a corrected one.For information on whether you must file a return, see Pub. 501…”
I am trying to reconcile these two publications in my mind Pub 970 and the instructions for the 1099 misc).
Why should there be any “repercussions/issues”? This is what you are supposed to do. Again, from IRS Pub 970:
*How you report any taxable scholarship or fellowship grant income depends on which return you file.
Form 1040. If you file Form 1040, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1.*
If your student did not receive the scholarship in exchange for personal services, the money would not be properly reported on a W-2. Unless it’s an educational institution where your student is enrolled, the organization will not issue a 1098-T.
You have seen what IRS Pub 970 says about how to report this scholarship income. It’s clearly stated. What else are you confused about? Don’t get hung up on the fact that the scholarship organization reported the scholarship on a 1099-MISC. They probably shouldn’t have done this. Their mistake doesn’t alter the way that the taxable scholarship needs to be reported on your student’s tax return.
What I am asking is that to report the scholarship as line 1 income on the 1040, then I am ignoring the 1099misc that was sent to both DD and to the IRS, and thus I am reporting it how I see fit and not how the organization sees fit. Does the IRS red flag tax returns in situations like this?
While I appreciate you saying that I should not get hung up on this, I am wondering how, if at all, the IRS reconciles the fact that a 1099misc was issued, yet the taxpayer is ignoring the 1099misc and entering the income another way and on another line on the 1040. I do not have a tax practice, nor has my DD has this type of income before, and thus do not have any history with this. I am genuinely curious as to how this is viewed.
If the money received by your student is indeed a scholarship as the IRS defines that term, it is likely that the awarding organization acted in error by issuing a 1099-MISC. I am not an IRS employee or otherwise professionally involved in creating or enforcing tax laws or rules, and I am not a tax lawyer, CPA or professional tax preparer, so this is only my opinion. If you want a professional opinion or an opinion that you can trust more than what you get on an anonymous internet forum, contact the IRS or hire a tax lawyer, CPA or professional tax preparer.
If the awarding organization did make a mistake by issuing the 1099-MISC, that doesn’t change the way that the scholarship should be properly reported on the student’s tax return. So no, you would not be reporting it “as you see fit;” you would be reporting it as the IRS clearly tells you it should be reported.
I think it highly unlikely that the IRS will audit your daughter for the income reported on the Misc1099; she’s not asking for a refund of any amount withheld from that income. If she is audited (and it would be a paper audit for that one item and not a full blown audit), you have the proper paper trail to show how that income was handled.
When I worked for a government agency, we required the law firms accepting settlements to complete an I-9 and then we’d issue the firm some type of 1099. Those weren’t taxable funds to the law firms as they were passed through to the clients. The firms were very used to them (I was the one saying “this isn’t right! this will screw up their taxes!”) and I guess just ignored the 1099s when they arrived. Our records accounted for the funds going out, they ignored the unnecessary tax forms.
I think that is your issue here. The company issuing the 1099 has to account for the scholarship money going out in some way, and they do it by a 1099 Misc. Your daughter may not even be required to file a tax return, and in that case this 1099 Misc would go ‘unmatched.’ It happens all the time that 1099s, W2s and other issued forms aren’t matched with a taxpayer’s return.
Thank you @twoinanddone for your thoughtful insight. You defined the issue that was really bothering me much more eloquently than I did.
And thank you to everyone who replied to my post, especially @BelknapPoint. I do realize that not everyone replying is a tax expert, but nonetheless folks post their thoughts/perspectives in order to assist me in figuring all of this out. I did learn a lot from all of the information that I gathered from you all and respect and realize that the onus is on me to verify info and to seek out additional professional advice if I need to.