Scholarships, Taxes Question

[hopskipjump]

I'm not sure who to ask - an accountant? The financial aid department at dds school?

 

DD is fortunate to have received combined athletic + academic scholarships. Both of these, added together, come to approximately $x,000 over her expected Cost of Attendance (this year, anyway...). So - after all her tuition, fees, meal plans, books, and room are paid for, theoretically there should be around $x,000 left in her account.

 

If I understand correctly, ANY scholarship $ that goes beyond TUITION ALONE is taxable. Is this correct? (or is this one of those things that changes depending on your tax bracket/income?)

 

So, any scholarship $ beyond TUITION is taxable as INCOME for HER - including that additional $x,000 EVEN IF SHE DOES NOT USE IT? (Sorry for the caps, just trying to maximize that part of the question. I'm only shouting at the confusion little bit. :lol: promise.)

 

(I've always done our taxes, but I think this next year I will take all our paperwork to an accountant and let them have at it for us and for dd. This is all making my brain hurt!)

 

And, I will need to ask the school what happens to any potential overage, right? We shouldn't assume it will just sit in her account and accumulate to put toward the next year?

[Lori D.]

First, always best to speak with a knowledgeable tax consultant. Second, While I would ask the college to make sure, yes, scholarship overage goes into the student's pocket, to be spent as the student wishes. And yes, scholarship monies that are used for expenses other than tuition and books must be declared on the student's income tax form under gross income.

 

ETA: You might consider having your student set aside any overage in an interest-bearing account, and then use it the following spring to pay taxes owed on the taxable portion of the scholarships. :)

 

Specifically about what part of a scholarship/grant is or is not taxable, see this IRS info page on Tax Topic 421, Scholarships, Fellowship Grants, and Other Grants. In a nutshell that webpage says:

 

Tax Free scholarship/grant money that is used for:

- tuition and fees

- books, supplies, equipment *required* for courses at the college 

 

Taxable (i.e., must include as part of your gross income) scholarship/grant money that is used for:

- incidental expenses

- room & board

- travel

- optional equipment

 

So, scholarship monies your student uses on tuition & fees or required books/supplies/equipment (i.e. a laptop that might be required by the school or the degree program) is not taxable. However, scholarship money spent on dorm/housing, meal plan/groceries, travel, and other non-required supplies and equipment IS considered gross income and IS subject to be taxed.

 

Here's a helpful article on Taxability of Scholarships, from FinAid.

Also, you might find this recent thread helpful: "Taxes, dependents and 1098-T form".

 

 

ETA -- PS

And I forgot to add the most important thing -- CONGRATS on the scholarships! :)

Edited April 30, 2016 by Lori D.

[hopskipjump]

Bless you, @Lori D.! We need a bowing-down emoticon.... so this'll have to do: :cheers2:

 

Now I'll go be slightly grouchy about dd having to pay taxes on money she isn't actually receiving in-hand (because she's likely to be at a relatively high tax bracket, isn't she? She's only had a tiny summertime job income thus far. This is going to total "real" income amounts). :glare: (although, she is very blessed to have this "problem" and, as problems go, this is a nice "problem" to be dealing with)

 

And next week I'll start asking around locally for tax consultants to interview for this next year(s) taxes - because this is all going to be way out of my comfort zone to deal with - don't want to cause dd (r us!) to overpay!

 

So - how strict is the "requirement?" She needs a laptop because it's college. But, she doesn't neeeeeed a specific laptop for a specific program in college. hmmm. I'll read the links you posted tomorrow when I'm more awake and will likely find that answer somewhere. :)

[MorningGlory]

Thank you for asking this question! And thank you, Lori, for answering and posting links.

 

My son's school will give him a large stipend specifically earmarked for room and board. So from what I understand from reading this, that entire stipend is taxable?? Yowza. 

 

 

[anne1456]

Also I believe that since scholarships are unearned income the amount over tuition & supplies is subject to the "kiddie tax", which means they are taxed at your income tax rate, not the child's. So the tax hit is likely to be even larger. I'd definitely consult an accountant, at least the first year to understand how it all works.

[8filltheheart]

Most accountants are not well versed on this topic. The school will not answer tax questions.

 

In addition to scholarships, research fellowships like REUs are classified in the same category as scholarships and taxed at the same rate.

 

It is complicated, but it is doable. Most tax software incorporates this. Pub 970 explains it. Form 8615 is the form that kicks in for the taxes. Basically here is how it works.

 

Any amt above their QEE (like Lori listed) is considered taxable income. In terms of being taxed, they can claim their personal deduction. After their personal deduction, the amt is taxed at the PARENT'S unearned tax rate. Know how your state tax law works. Our state does not tax scholarship $$.

 

If your family qualifies for the AOTC ***and*** the scholarships are NOT tagged as tuition scholarships, but only in the amt equivalent to tuition, you can shift the amt paid toward tuition by the scholarship money down $4000 and shift personal expenditures toward tuition up to include $4000.That increases the taxable scholarship amt by $4000, but it will allow you to claim the AOTC of $2500.

 

http://talk.collegeconfidential.com/financial-aid-scholarships/1881215-yet-another-scholarship-tax-question-p1.html

 

ETA: I forgot to mention that if your child's taxes are above a certain amt (I can't remember the exact amt, but I think it is $1000), your student will have to make quarterly tax payments in subsequent yrs on that amt.

Edited April 30, 2016 by 8FillTheHeart

[G5052]

Most accountants are not well versed on this topic. The school will not answer tax questions.

 

Yes, this is very important. I used a CPA some years back for a complex estate question. My lawyer had recommended her. But on college and young adult issues? She seemed tentative and had to research it.

 

We ended up going with a local accountant who is an enrolled agent. She's a single mom and has put three kids through college. She really, really knows the college issues, and got it all worked out for us.

Edited April 30, 2016 by G5052

[PuddleJumper1]

 

 

So - how strict is the "requirement?" She needs a laptop because it's college. But, she doesn't neeeeeed a specific laptop for a specific program in college. hmmm. I'll read the links you posted tomorrow when I'm more awake and will likely find that answer somewhere. :)

 

We've run into this each tax season with ds who is on almost full scholarships. We've actually been able to do his online with TurboTax (other software did not deal with this income well). 

 

As far as the above question. It was explained to us that in order to count it in the non-taxable money the equipment/books/supplies has to be specifically required within a class (ie - the teacher has stated in their syllabus that the student must have a laptop to complete the class). 

Edited April 30, 2016 by PuddleJumper1

[Lori D.]

Just adding in that the acronyms that 8FillTheHeart is referring to are:

 

Qualified Educational Expenses (QEE) -- what is allowed as an educational deduction, and is not taxed

American Opportunity Tax Credit (AOTC) -- family tax credit for educational expenses

 

and Research Experiences for Undergraduates (REU) -- college summer programs that provide a stipend

[Lori D.]

Thank you for asking this question! And thank you, Lori, for answering and posting links.

 

My son's school will give him a large stipend specifically earmarked for room and board. So from what I understand from reading this, that entire stipend is taxable?? Yowza. 

 

Sadly, yes. But congrats on the stipend! :)

 

Perhaps try playing a mental game with yourself to try and take the sting out of it by pretending that the stipend is wages earned for the job of going to school and doing well, and you get a W-2 from the college for tax purposes, just like you get a W-2 from an employer...

[Grantmom]

Wow, I had no idea that a scholarship for housing would be taxed.  Thank you for asking (and answering) this!  Yikes.  

[hopskipjump]

I'm still muddling through all of this. I've called three financial advisors/accountants who flat-out told me they have zero experience with this kind of thing. Ummmmm. Okaaaaay. That's helpful. UGH! We have zero local friends who have sent their kids "away" to college, most pay as they go to local universities (only small scholarships to deal with, so I guess that makes it fairly straightforward since there is no overage), so I can't ask anyone for recommendations.

 

Then dd logged into her portal tonight and the COA is $xk MORE than it has been listed anywhere else! WHAT THE ACTUAL HECK?!?!? I am SO frustrated with this whole stupid process. The athletic department specifically offered an amount that, when combined with her academic scholarship, would ensure she wouldn't owe anything, and now it's showing she'll owe $1k this year. I'm hoping their "new" COA includes lots of fluff (of course, it's not specifically spelled-out anywhere... just a lump-sum mystery number).

 

This needs to be a more simple and clear process. This year I have spent gobs of hours trying to add up how much each year will cost. These numbers don't matter to a few sections of families (those wealthy enough to pay whatever-is-the-balance, those who are willing to take out parent and student loans, or those who are poor enough to qualify for extensive aid) -- but by god, it matters to the rest of us!!!!!! :cursing: Right now, we don't have that much "disposable" income! Argh! Thank goodness I apparently have plenty of "disposable" time on my hands!  :glare: 

 

 

 

 

[MorningGlory]

ETA: You might consider having your student set aside any overage in an interest-bearing account, and then use it the following spring to pay taxes owed on the taxable portion of the scholarships. :)

 

That is why I am so glad that I saw this thread; I'm not sure how I missed the other thread that Lori linked to in her reply...I thought I was a better WTM reader than that! Now we (including ds) can be prepared for the likelihood that he will have to pay taxes. The problem with a housing/meal plan stipend is that it is not "money in hand" (like hopskipjump mentioned), so the $ to pay the taxes on it will have to come from another source. One helpful bit is that for the first "year", he will only be taxed on the fall semester portion of the stipend (and possible overage), so we can get a decent idea of what this is going to cost without it being a full year's worth.

[8filltheheart]

One helpful bit is that for the first "year", he will only be taxed on the fall semester portion of the stipend (and possible overage), so we can get a decent idea of what this is going to cost without it being a full year's worth.

It normally does not work the way. Most billing occurs before the semester starts, so scholarship $$is dispersed in Dec and an entire school yr falls into the fall tax yr.

[Lori D.]

It normally does not work the way. Most billing occurs before the semester starts, so scholarship $$is dispersed in Dec and an entire school yr falls into the fall tax yr.

 

Yes, that's how it worked for us.

 

Tuition & fees had to be paid about 6 weeks before the actual semester started -- so, for the fall semester, we had to pay by end of June (for mid-Aug. start date), and for the spring semester, we had to pay by mid-Nov. (for early Jan. start date). The scholarships were deducted from what was charged for tuition at the time of billing -- in other words, the scholarship $$ for both semesters were dispersed in the same calendar year.

 

Any federal monies -- grants or loans -- that a student is awarded are not dispersed until 2 weeks into the semester.

 

Morning Glory -- you might want to call the school now and find out WHEN they award the housing/meal stipend. Usually, colleges bill for those at the same time as tuition, so your stipend may be awarded in advance of the semester starting -- so, there's a high likelihood you will have the entire year's stipend to pay taxes on for next year.

 

If that is a full stipend (covering full cost of room & board), that typically runs $8-10K. You can do a quick rough calculation now, to get an idea of how much your student will owe in taxes: add the student's actual stipend amount to whatever income the student has made so far this year (and estimate income for the rest of the year). Remember that the student can take up to $6300 as the deduction, so the student only pays taxes on the amount of income + stipend that is over the $6300. But also don't forget -- the student has to pay both federal and state tax. Here is an example of a dependent college-age student and various tax scenarios.

Edited May 5, 2016 by Lori D.

[kiso1]

I totally did not know the room and board grants were taxable. So, if I'm understanding this correctly, this is taxable income for the student?

[hopskipjump]

I totally did not know the room and board grants were taxable. So, if I'm understanding this correctly, this is taxable income for the student?

 

Yes, to the student.

 

But, I'm trying to figure that out. DD had a small, part-time job last summer and she had to fill in her own taxes this year even though it was a tiny amount. There's so much cross-over (her bills, us paying parts of them, etc) that I am wondering how all of that is going to even work. :/

[Lori D.]

I totally did not know the room and board grants were taxable. So, if I'm understanding this correctly, this is taxable income for the student?

 

Yes. Check out post #2 above, but more importantly, this IRS info page which discusses which monies are tax-free and which are taxed: Tax Topic 421, Scholarships, Fellowship Grants, and Other Grants.

 

Also helpful in sorting out what parts of scholarships, grants and stipends are taxable and which are not:

 

H&R Block: College Financial Aid Tax Tips -- brief but clear list of what is/is not taxable financial aid AND specifically how to report it on which form

 

How Stuff Works: Types of Financial Assistance: Is Financial Aid Taxable -- more in-depth article:

- types of monies and which are taxable/not taxed

- some specific exemptions to taxable scholarships/grants/fellowsips

- questions to help you determine tax-free, or, taxable

 

 

So, in brief:

 

NOT taxed if the student is in a degree program AND:

- if used for tuition & fees

- if used for required (of all students) books, supplies, equipment

- if a federal Pell grant, SEOG grant, or state grant AND used for qualifying expenses (first 2 items immediately above)

 

Taxed as Income:

- if NOT in a degree program, even if used toward tuition & fees or qualifying expenses

- if used for room & board

- if used for travel

- if used for optional equipment, supplies, and personal items (e.g.: dorm furnishings)

Edited May 5, 2016 by Lori D.

[Lori D.]

Yes, to the student.

 

But, I'm trying to figure that out. DD had a small, part-time job last summer and she had to fill in her own taxes this year even though it was a tiny amount. There's so much cross-over (her bills, us paying parts of them, etc) that I am wondering how all of that is going to even work. :/

 

Possibly of help:

Turbo Tax: I have a dependent with a taxable scholarship -- who claims what and on which form

and

"Taxes, dependents and 1098-T form" -- past thread (also linked up in post #2)

Edited May 5, 2016 by Lori D.

[kiso1]

 

Turbo Tax: I have a dependent with a taxable scholarship -- who claims what and on which form

 

Based on the information from this link, because our son is not filing taxes and we claim him as a dependent, it seems we the parents will have the add the overage from the grants to our income.

 

Our income tax reporting has never been this complicated. I guess we also will have to consult an accountant. Any recommendations for an accountant in the Baltimore, Md area?

[MorningGlory]

It normally does not work the way. Most billing occurs before the semester starts, so scholarship $$is dispersed in Dec and an entire school yr falls into the fall tax yr.

 

Ahhh...I understand now. Thanks, 8 (and Lori).