Are college scholarships taxable?

[RegGuheert]

I'm wondering a few things about taxes related to DS19's college scholarships:

 

1) Do they count as income such that they impact whether he would need to file his own tax return?

2) Are they taxable?

3) If they are taxable, at which marginal tax rate, ours or our DS's?

 

Any links for relevant information would be appreciated.

 

TIA!

[Kathy in Richmond]

I'll address the case where our children are still counted as dependents on the parents' tax return (our situation).

 

It is my understanding that the scholarship money is taxable only to the extent that it exceeds required tuition and fees. If it provides part or all of the cost of room & board, then that part is taxable income. It impacts our tax return, not our child's. We receive a Form 1098-T from our son's college each year, spelling out the exact figures.

 

~Kathy

[Susie-Knits]

My understanding is the same as Kathy's above.

 

Here is a link to Finaid site that explains the details -

http://www.finaid.org/scholarships/taxability.phtml

[Kareni]

Agreeing with Kathy and Susie-Knits. And thanks for that link, Susie-Knits. We had to educate our tax accountant ourselves!

 

Regards,

Kareni

[April in CA]

Aak! What a thought! My son will receive a scholarship to cover 4 years of tuition (20K+ a year); I sure hope we don't have to pay taxes on that! He has applied for a few other scholarships to help with room, board, and books; if they come through, he or we would have to pay tax on an extra $2000 per year or so. That, while morally offensive to me, is at least doable.

Thanks for this info - there is always something interesting to learn!

Blessings,

April

[RegGuheert]

Thanks for the prompt replies and the excellent link!

 

It sounds like we are OK for 2009, since DS19 only receives a couple of smallish academic scholarships. But DD17 starts this fall with a full scholarship for tuition, room & board and some books. So I'm wondering: Is it the amount that matters, or how the scholarships are allocated? In other words, can we take the total amount of the scholarships and subtract expenses for tuition, fees, books and equipment and pay taxes on what is left over?

 

Thanks again!

 

ETA: Since the taxes are charged on the parents' taxes, can the scholarships for two or more children be combined and the education expenses for the same children be subtracted for tax purposes? I'm guessing the answer is "No", but one can hope!

Edited April 2, 2010 by RegGuheert

[Kathy in Richmond]

Yes, that's how it's done. The Form 1098-T gives provides a box for "amount billed for qualified tuition and related expenses" and another box for "scholarships or grants". If the second box exceeds the first, then it's taxable.

 

~Kathy

[TravelingChris]

I believe the books, if mandatory, are tax deductible too. Just the room and board and fees like student activity fees. The thought is that you have lots of college aged students in the country. Why should Joe Smith have to pay taxes on the part of his income from a job that pays his apartment rent and food costs while Susie Smith who goes to college and yet gets a scholarship that covers lodging and food not have to pay. In order to make it equal, they don't let either deduct. The part that is for tuition is deductible in the same way that work supplies and training for a job is deductible.

[Lisa in TN]

My dd declared this income on her own tax return, not the parents'. It was HER income, not ours, and the Form 1098-T was issued in her name.

 

I think it probably saves money for this income to appear on her tax return instead of ours, since she is in a lower tax bracket. But honestly, I did not think we had the option to count it on the parents' tax return, because it was not the parents' income.

[lizziebeth]

I agree with Lisa - my daughter's 1098-T was in her name, so the taxable portion was included on her 1040.

[Halftime Hope]

has a lot to say about this.

 

It states that the parents can include the finances on their own tax return if they claim an exemption for the dependent.

 

Dd will not make enough on her own to take full advantage of the American Opportunity tax credit, so we'll be claiming that on our return. We will pay taxes ourselves on any institutional scholarships used to pay for her room and board. On her return she'll pay taxes for any non-institutional scholarships she receives which do not get used to pay for qualified expenses, and she'll pay taxes on wages she earns.

[lizziebeth]

Valerie - I'm wondering how an education credit is available if the student has received funds in excess of eligible expenses? Am i missing something? I had always assumed that no credits would be available since neither the parent nor the student paid the expenses personally. I hope I'm wrong!

[Kareni]

Valerie - I'm wondering how an education credit is available if the student has received funds in excess of eligible expenses? Am i missing something? I had always assumed that no credits would be available since neither the parent nor the student paid the expenses personally. I hope I'm wrong!

 

This was basically our experience this tax year. Our daughter received a need based grant from her college that covered all of her tuition. Consequently we did not receive a 1098-T from the college. Since she also received federal need based monies, we actually paid taxes for monies received above the amount that covered tuition, fees, and books.

 

Regards,

Kareni

[Halftime Hope]

Valerie - I'm wondering how an education credit is available if the student has received funds in excess of eligible expenses? Am i missing something? I had always assumed that no credits would be available since neither the parent nor the student paid the expenses personally. I hope I'm wrong!

 

I agree with what you stated. (Did I write something that seemed otherwise? :001_huh: If so, oops!) I believe that education credits are only available for out of pocket expenses that the family pays for tuition, certain fees, books, and certain required supplies, perhaps things like required art supplies and something like a required Mac for a graphic design major. (I'm a bit unclear on the last category, so don't quote me.)

 

The situation that I had in mind was that if a student receives funding that covers part of the eligible expenses, but the parents has to pay the rest, then the parent can claim the amount they paid a tax credit, within the rules established by the IRS. Here's an example, without getting into need-based funding. Say a kid gets a merit scholarship that pays for all of their tuition. They would still have the cost of books, fees, and the grey "required supplies" area that would be creditable expenses on the parents' income tax. While the student could claim those expenses on their tax return, if the student is not earning very much, and thus would not owe enough to take advantage of the credit, it might be in the best interest of the famly for the credit to be taken on the parents' return. If the student owes nothing or less than the credit allows, I believe there is a refund available, but it is capped at 40% (?) of the creditable amount. In our case, b/c we'll be paying those expenses and she is a dependent, it will come off our return, not hers.

 

Did that help?

[lizziebeth]

I agree with what you stated. (Did I write something that seemed otherwise? :001_huh: If so, oops!) I believe that education credits are only available for out of pocket expenses that the family pays for tuition, certain fees, books, and certain required supplies, perhaps things like required art supplies and something like a required Mac for a graphic design major. (I'm a bit unclear on the last category, so don't quote me.)

 

The situation that I had in mind was that if a student receives funding that covers part of the eligible expenses, but the parents has to pay the rest, then the parent can claim the amount they paid a tax credit, within the rules established by the IRS. Here's an example, without getting into need-based funding. Say a kid gets a merit scholarship that pays for all of their tuition. They would still have the cost of books, fees, and the grey "required supplies" area that would be creditable expenses on the parents' income tax. While the student could claim those expenses on their tax return, if the student is not earning very much, and thus would not owe enough to take advantage of the credit, it might be in the best interest of the famly for the credit to be taken on the parents' return. If the student owes nothing or less than the credit allows, I believe there is a refund available, but it is capped at 40% (?) of the creditable amount. In our case, b/c we'll be paying those expenses and she is a dependent, it will come off our return, not hers.

 

Did that help?

 

Aaaah, I see. Thank you for taking the time to clear that up - I guess I had "scholarships in excess of expenses" on the brain since I just finished working on my dd's tax return. It still feels "wrong" to me that tax should have to be paid on scholarship $$ - but, hey, who said our tax system makes sense?

[Halftime Hope]

It still feels "wrong" to me that tax should have to be paid on scholarship $$ - but, hey, who said our tax system makes sense?

 

I think this is the exact situation that Cathmom was referring to in another thread. If I understood it correctly, her son rcvd. FA to meet all his expenses. Although that financial aid went directly to the institution--they never saw a penny of it--they still have to pay taxes on the part that paid for his room and board.

 

I guess the bright side to it is that in spite of the difficulty of paying taxes on that "income", the net result is that it means less debt for the student or the family.

Edited April 13, 2010 by Valerie(TX)