Student paying taxes on scholarships?

[Ann.without.an.e]

DD is narrowing down her "apply to" list (she is a senior next year) and I'm trying to figure out the financial end of this stuff.  I mocked it in turbo tax to see how paying for college would change our return.  It gave me a warning that DD would need to pay income tax on any scholarship money that covered room/board. 

 

How did this work for you kiddos?  Can they designate any loan money to room/board to avoid this?  or do their student loans have to go toward tuition?

[JanetC]

You will get s 1098 T from the school showing the eligible tuition and required fee expenses. If the scholarship exceeds that amount, the rest would be taxable.

 

Schools do try to minimize the tax impact of the scholarship where possible, but if the scholarship is applied to the entire amount on the 1098, you would lose almost all eligibility for AOTC. (Required textbooks and other required class expenses not shown on your 1098 are also allowed for AOTC.)

 

529 funds can be applied to room and board as well as a student computer. I believe most other tax benefits only apply to tuition and required expenses.

[nancy in nj]

I know in our case it made sense for my dd to declare the income from scholarships so that my husband and I could take a federal tax credit.  I think there were some threads on here about it, but if not there are definitely thread on college confidential.  If you can't find the info you need pm me and I will have my husband explain it in detail.

[Pegasus]

Unless the scholarship specifically states that it is for tuition, you can decide how much of it goes towards tuition and other qualified expenses and how much goes towards non-qualified expenses. This is true no matter how the school automatically applies it.

 

As stated upthread, it can be advantageous for the student to intentionally claim some of the scholarship funds as going towards non-qualified expenses and paying income tax on it.  This is because the parent can then claim some of the qualified expenses for the AOTC.  So, the student pays a little more in income tax and the parent gets a bigger credit. I then turned around and gave the AOTC refund $$ to my DD to stash away for future school expenses.

[Ann.without.an.e]

I know in our case it made sense for my dd to declare the income from scholarships so that my husband and I could take a federal tax credit.  I think there were some threads on here about it, but if not there are definitely thread on college confidential.  If you can't find the info you need pm me and I will have my husband explain it in detail.

 

 

Unless the scholarship specifically states that it is for tuition, you can decide how much of it goes towards tuition and other qualified expenses and how much goes towards non-qualified expenses. This is true no matter how the school automatically applies it.

 

As stated upthread, it can be advantageous for the student to intentionally claim some of the scholarship funds as going towards non-qualified expenses and paying income tax on it.  This is because the parent can then claim some of the qualified expenses for the AOTC.  So, the student pays a little more in income tax and the parent gets a bigger credit. I then turned around and gave the AOTC refund $$ to my DD to stash away for future school expenses.

 

 

 

Is this something you can decide when tax time comes or do you have to know how this will work when you pay for the semester?

 

Thanks

[Artichoke]

Is this something you can decide when tax time comes or do you have to know how this will work when you pay for the semester?

 

Thanks

 

 

I believe this is something you'd need to know when you pay.  Your scholarship would be applied to pay a particular portion of the bill since you're charged separately ( or would itemized be a better word )  for fees, tuition, room and board, etc. 

[nancy in nj]

I don't think so....my husband figures out the prior year's allocation of her financial aid the following January when he does our estimated tax return for purposes of filing the next year's FAFSA.  You definitely don't have to conform your allocation to anything official the school sends out.

Edited April 3, 2016 by nancy in nj

[8filltheheart]

If the scholarship is a tuition scholarship, no.  If the scholarship is worded as "the equivalent of tuition," you can.  Any amt over the cost of QEE (tuition, books, fees, etc) is taxable at the parents' unearned income rate.  The student is allowed to claim their personal exemption.  

[JanetC]

If the scholarship is a tuition scholarship, no.  If the scholarship is worded as "the equivalent of tuition," you can.  Any amt over the cost of QEE (tuition, books, fees, etc) is taxable at the parents' unearned income rate.  The student is allowed to claim their personal exemption.  

 

At the parents' rate? Really? I have seen that assets the parent is putting in the child's name are taxed at the parent's rate, but if it's the student's scholarship is that really how it works?

[8filltheheart]

At the parents' rate? Really? I have seen that assets the parent is putting in the child's name are taxed at the parent's rate, but if it's the student's scholarship is that really how it works?

 

Yes. IRS form 8615 https://www.irs.gov/pub/irs-pdf/i8615.pdf

 

 

unearned income over $2,100 is taxed at the parent's rate if the parent's rate is higher than the child's. If the child's unearned income is more than $2,100, use Form 8615 to figure the child's tax

 

Unearned Income For Form 8615, “unearned income†includes all taxable income other than earned income as defined later. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

 

Who Must File Form 8615 must be filed for any child who meets all of the following conditions.

1. The child had more than $2,100 of unearned income.

2. The child is required to file a tax return.

3. The child either: a. Was under age 18 at the end of 2015, b. Was age 18 at the end of 2015 and did not have earned income that was more than half of the child's support, or

c. Was a full-time student at least age 19 and under age 24 at the end of 2015 and did not have earned income that was more than half of the child's support.

 

A student cannot use scholarship $$ toward support.  Same with research grant $$ (REUs).  Since they cannot use scholarship $$ to count toward support, it is the rare student that can claim that they are providing 50% of their support while a full-time student. (Ours can't.  We thought he would be able to this yr until we learned that research $$ is considered a fellowship and falls into the same category as scholarship $$.)

[JanetC]

Yes. IRS form 8615 https://www.irs.gov/pub/irs-pdf/i8615.pdf

 

 

A student cannot use scholarship $$ toward support.  Same with research grant $$ (REUs).  Since they cannot use scholarship $$ to count toward support, it is the rare student that can claim that they are providing 50% of their support while a full-time student. (Ours can't.  We thought he would be able to this yr until we learned that research $$ is considered a fellowship and falls into the same category as scholarship $$.)

 

This is very weird. I had been going by Publication 970 (the one on education expenses) and it doesn't doesn't even mention Form 8615.

 

irs.gov/pub/irs-pdf/p970.pdf

 

Page 6 and 7, how to declare, only talks about 1040's.

 

So, if the scholarship is taxed at the parent's rate, does that mean the form 8615 is part of the parent's return or the child's? A scholarship is like capital gains earned by the parent? How do you figure out your unearned income tax rate?

[8filltheheart]

This is very weird. I had been going by Publication 970 (the one on education expenses) and it doesn't doesn't even mention Form 8615.

 

irs.gov/pub/irs-pdf/p970.pdf

 

Page 6 and 7, how to declare, only talks about 1040's.

 

So, if the scholarship is taxed at the parent's rate, does that mean the form 8615 is part of the parent's return or the child's? A scholarship is like capital gains earned by the parent? How do you figure out your unearned income tax rate?

It is part of the child's but it cannot be figured out until the parent's taxes are completed. It is the Kiddie tax. We ended up using Turbo Tax bc every accountant we talked to this yr was no better at helping us than TT last yr. Make sure you check your state laws. TT tried to tax his scholarship, but our state does not tax scholarship $. (Thank goodness bc he owes so much taxes on his scholarships that we have to make quarterly payments. If your child underpaid by at least $1000 and the scholarships will be there next yr, make sure you make quarterly payments or you will face fines.)

 

As far as rate, it is the highest marginal tax rate once the scholarship money is added to your income. Here is a post about that from CC:

http://talk.collegeconfidential.com/financial-aid-scholarships/1855349-for-m-8615-kiddie-tax-calculation-which-applies-to-taxable-scholarship-income.html

I thought I understood how the tax was calculated for unearned income from taxable scholarships, that the parent's highest marginal tax rate is used.

 

But when I did our taxes today, the amount the tax software caculated was higher than the net earned income multiplied by our tax rate.

 

Well after looking at the lines on the 8615 filled in by the software, I finally understand.

 

The tax is calculated by adding the net unearned income (the lower of taxable scholarship income minus $2,100 or amount of taxable scholarship income minus standard deduction) to the parent taxable income (line 43 1040) and then figure the tax on that and subtract the original tax that was computed on the lower parent income (line 44 1040), that is the tax student pays.