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Got an alert this week from my VITA organization about taxable scholarships, which raised a point of tax law I had previously been unfamiliar with.

Typical situation: Client produces a 1098-T with a number in Box 5 (Scholarships & Grants) that is larger than the number in Box 1 or Box 2 (qualified expenses paid/billed). If the difference is greater than the amount spent on qualified expenses not included on the form (typically books), there is no education credit.

New to me wrinkle: Scholarships in excess of qualified expenses are supposed to be taxable income included on Line 7 of Form 1040. Apparently this has been the case for several years, and I've been blissfully ignorant of it until now.

The open question to the local VITA program director, which has not yet been answered, is this: Suppose the student is a dependent on the parents' return. Any credit goes on the parents' return, even though the 1098-T is reported under the student's SSN. If there is scholarship income, does it belong on the student's return or on the parents' return?

Disclaimer: I understand that colleges are notorious for issuing incorrect Forms 1098-T. In particular, I'm told that sometimes loans are incorrectly included in Box 5. In the VITA space, it can be a challenge to determine the facts of a specific situation; but I'd like to at least understand what ought to happen, even if I have trouble determining the true fact pattern.

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