Allocating outside scholarships & taxes

[Nancy in NH]

DS has been awarded two scholarships (not awarded by his school).  The first award has sent him a check for 1/2 the amount this past week.  The other 1/2 will be sent in November.  The letter does not stipulate it is to be split between fall/spring semesters, but that seems pretty much implied.  The other scholarship was sent in full and applied already to his student account.  The school gave him the option to split the amount however he would like (it will be split about 50/50 over the two terms but not exactly, since the scholarship did not have any specific stipulations).  In addition, he was awarded a Pell grant, which of course, is split over the two semesters.

 

Are they considered taxable in the year that they are awarded or in the year in which they are applied towards the student's tuition?  The two awards will be sent to him in full during this tax year, but about 1/2 of the awards will credited towards tuition for the spring 2018 term.  Tuition is due for the spring term on Jan 2, so I could put off paying until 2018.  It seems that would complicate matters, but I'm not really sure.  Do I just keep track of when the amounts are awarded and when we pay tuition and just include them in the years in which those things occurred?  In other words, if we pay the tuition bill in December and have the scholarships applied this year (even if part is for the spring), it will all be considered as occurring in 2017 for tax purposes?  I do not know yet how the school will report on the 1098-T (box 1 - payments received or box 2 - amounts billed).

I just want to be sure I'm keeping track of them in the proper tax year and wondering if it matters whether we pay for the spring this year or next.  Now that I type that, I suppose if matters very much how the school reports on the 1098-T, am I right?

 

Ugh!  I've read previous threads regarding scholarships and taxes, but I haven't seen any addressing this question.  Maybe because I'm just not tax savvy and it's there and I'm not getting it.  Can someone explain this to me?

 

 

[Ann.without.an.e]

I wish I knew how it all worked.  I keep hearing it is taxable too and since dd has a full scholarship I am nervous about navigating it.  I called several tax specialists and they seem to think it isn't taxable and I even talked to FA and they said that they will not issue a 1098T for scholarship money at all since it isn't required.  I am just commiserating with you  :huh:

Edited August 28, 2017 by Attolia

[Lori D.]

On 8/27/2017 at 10:55 AM, Nancy in NH said:

Are they considered taxable in the year that they are awarded or in the year in which they are applied towards the student's tuition?  ... if we pay the tuition bill in December and have the scholarships applied this year (even if part is for the spring), it will all be considered as occurring in 2017 for tax purposes? ...

I just want to be sure I'm keeping track of them in the proper tax year and wondering if it matters whether we pay for the spring this year or next.  Now that I type that, I suppose if matters very much how the school reports on the 1098-T, am I right?

Yes, you've got it right. ?

Merit aid that is not used for tuition/fees and required books/supplies is considered a form of income, and would be declared in the year it is received. So money received in November 2017 to be used for the spring 2018 year is still income for 2017. So you will have some money spent on things that are not qualified education expenses (room and board, non-required supplies, transportation, etc.) in both the fall 2017 and spring 2018, and this is the portion of the merit aid (whatever was not spent on qualified expenses) that must be declared in the year it was received. (If you think about it, this works out, because in the fall of 2018, your student will receive money for both fall 2018 and spring 2019, and any money not spent on a qualified education expense gets included as income on the 2018 tax return.)

Be sure to pay your spring semester tuition & fees in the fall of the previous year, and by doing so, you would NOT report that amount of the aid on the 2017 taxes, because it went for a qualified educational expense. For your 2017 tax return, in the spring, the college should send you a form 1098-T to show the amount of qualified educational expenses the student paid in the form of tuition & fees; that should show both the payment for the fall 2017 and spring 2018 tuition (as long as you made both payments in 2017).

Pell Grant money is considered in the same way as scholarships -- any portion that is not spent on qualified educational expenses is reported as income.

This web article, FinAid: Taxability of Scholarships, explains scholarships and taxability, and has lots of links to IRS publications that help clarify.

Congratulations on the various awards! And hope your student has a fantastic year! Warmest regards, Lori D.

Edited September 17, 2018 by Lori D.

[8filltheheart]

I'd have to look it up, but somewhere we read that you can do entire school yrs together in the same tax yr, so that is the way we have done it. So, everything for freshman yr was filed with that yr's taxes.

 

I wish I knew how it all worked. I keep hearing it is taxable too and since dd has a full scholarship I am nervous about navigating it. I called several tax specialists and they seem to think it isn't taxable and I even talked to Duke and they said that they will not issue a 1098T for scholarship money at all since it isn't required. I am just commiserating with you :huh:

It is taxable, regardless of what you are being told. I am not joking that I called umpteen offices trying to find someone familiar with scholarships in excess of tuition and QEE. I never found a single one and was told they would have to research it. Anyone who tells you that it isnt is just plain wrong. If you hire them to do your taxes, I would make sure they guarantee their work and will be liable for any mistakes. https://www.irs.gov/pub/irs-pdf/p970.pdf#page6

 

Fwiw, I thought the law changed in 2016 and that 1098s were now required by law??

[Nancy in NH]

Thanks, Lori.  DS was thrilled and we were all so relieved when he was awarded the scholarships and grants.  He had made an agonizing decision over the winter and left behind over $45,000 in scholarships/grants at the university.  It was quite a shock to find out he could not afford to transfer to another 4 year college, because the transfer scholarships were not nearly enough to help him afford it.  He ended up finding a 2 yr program at a local CC (a 45 min. commute each way) that had his degree program (game design/programming), but he was pretty disappointed that he couldn't enroll where he really wanted to go.  The larger of the two scholarships is particularly geared to 2 year degree programs and to STEM students, so it all worked out to his benefit in the end.  We feel very blessed!

 

I'm still a bit fuzzy on something, though, since DS transferred schools.  He was enrolled in a univ. in the fall of 2016, but over winter break decided it wasn't for him and he made some big changes (moving back home and enrolling in our local CC).  We paid his spring 2017 for CC in full (he got no grants/scholarships and took no loans).  Over the summer, he was awarded the two scholarships and also the Pell grant.  Those combined will essentially cover nearly all his tuition and books for the 2017/2018 school year.  He does not room on campus and none of his grants/scholarships are going to pay for non-QEE expenses.  So, his 'net' of scholarships and tuition paid already in 2017 come out as a wash, or close to it, depending on how the scholarships and grants are treated.  You mentioned paying for spring 2018 this fall, but is that necessary if the net amount is already a wash due to us paying his spring 2017 tuition in full, when he was receiving no aid/scholarships?  Or must the scholarship awarded in 2017 be applied against only the 2017/2018 tax year?  Ugh!

 

I guess I'm also confused with respect to how the Pell grants are credited to his account.  So, if he received a Pell grant of $2,000 for the 2017/2018 school year (an arbitrary amount for the sake of this discussion), which will be split between fall and spring, does that mean that only $1,000 is considered in the 2017 tax year and the other $1,000 in 2018 since 1/2 is to be credited to his student account in 2018 (at least that's what I'm expecting--I will ask the school tomorrow about when that hits his a/c)?

From my experience with his previous school and in rechecking the 1098-T we received, it seems the schools have the option to report what was billed or what was received as payment.  The last school used box 2 (amounts billed), so there is no spill-over for us from the previous school (we neither paid tuition to that school, that was due in Jan., nor did he get any awards/grants for that term because he withdrew--we then paid tuition to the new school this Jan.).

 

I've read the IRS guidelines and many other resources regarding what is taxable and not taxable, so I think I understand that pretty well.  In fact, we had to fire the CPA we hired to do our 2016 taxes when it was clear he did not have a clue how to handle the college stuff.  At the time we were just concerned with the one semester in one tax year, and I figured that out.  Now that we are dealing with scholarships/grants awarded to DS in this tax year (in August for fall 2017/spr 2018) and tuition payments for two school years (three semesters--spr 2017 pd in Jan 2017, fall 2017 pd in Aug 2017, spr 2018, if I pay Dec 2017) in one tax year, I am still a bit confused.

 

I'm going to ask the school tomorrow how they report on the 1098-T and maybe that will help me sort it out??

 

Yes, you've got it right. :)

 

Merit aid that is not used for tuition/fees and required books/supplies is considered a form of income, and would be declared in the year it is received. So money received in November 2017 to be used for the spring 2018 year is still income for 2017. So you will have some money spent on things that are not qualified education expenses (room and board, non-required supplies, transportation, etc.) in both the fall 2017 and spring 2018, and this is the portion of the merit aid (whatever was not spent on qualified expenses) that must be declared in the year it was received. (If you think about it, this works out, because in the fall of 2018, your student will receive money for both fall 2018 and spring 2019, and any money not spent on a qualified education expense gets included as income on the 2018 tax return.)

 

Be sure to pay your spring semester tuition & fees in the fall of the previous year, and by doing so, you would NOT report that amount of the aid on the 2017 taxes, because it went for a qualified educational expense. For your 2017 tax return, in the spring, the college should send you a form 1098-T to show the amount of qualified educational expenses the student paid in the form of tuition & fees; that should show both the payment for the fall 2017 and spring 2018 tuition (as long as you made both payments in 2017).

 

Pell Grant money is considered in the same way as scholarships -- any portion that is not spent on qualified educational expenses is reported as income.

 

This web article, FinAid: Taxability of Scholarships, explains scholarships and taxability, and has lots of links to IRS publications that help clarify.

 

Congratulations on the various awards! And hope your student has a fantastic year! Warmest regards, Lori D.

 

[Lori D.]

On 8/27/2017 at 11:46 AM, Attolia said:

... I even talked to Duke and they said that they will not issue a 1098T for scholarship money at all since it isn't required...

I don't understand how Duke can NOT send out the IRS statements...? Even if your DD's scholarship is "full tuition", so that all of it goes to qualified educational expenses. DS#1 here had partial scholarships for tuition, and we still received the 1098-T forms...

The only thing I'm seeing about colleges not sending the 1098-T is the IRS waiving the penalty for college in certain circumstances from 2016 -- nothing about no longer not requiring colleges to file the forms.

Edited September 17, 2018 by Lori D.

[Julie of KY]

I don't understand how Duke can NOT send out the IRS statements...? Even if your DD's scholarship is "full tuition", so that all of it goes to qualified educational expenses. DS#1 here had partial scholarships for tuition, and we still received the 1098-T forms...

 

The only thing I'm seeing about colleges not sending the 1098-T is the IRS waiving the penalty for college in certain circumstances from 2016 -- nothing about no longer not requiring colleges to file the forms.

 

Not sure, but on Vanderbilt's website it clearly says that they will not send out a 1098T if the scholarships exceed the qualified tuition charges. It basically says the 1098T is useful in determining if you are eligible for additional tax credits. I have no idea if other tax forms are sent out.

[Nancy in NH]

Attolia and Julie in KY, thanks for bringing that up.  It prompted me to check the school's website to see if I could find information on how they handle the 1098-T.  Here is part of it:

 

"What is a 1098-T?

The 1098-T form is informational only and should not be considered as tax advice. It serves to alert students that they may be eligible for federal income tax education credits such as the Lifetime Learning Credit and the American Opportunity Credit as part of their Federal Income Tax Return. IRS Publication 970, "Tax Benefits for Higher Education," as well as Chapter 35 of IRS Publication 17, provide additional information on these credits. While it is a good starting point, the 1098-T, as designed and regulated by the IRS, does not contain all of the information needed to claim a tax credit. To determine the amount of qualified tuition and fees paid, and the amount of scholarships and grants received, a taxpayer should use their own financial records. There is no IRS requirement that you must claim the tuition and fees deduction or an education credit. Claiming education tax benefits is a voluntary decision for those who may qualify. A 1098-T is used in calculating a student’s eligibility for the American Opportunity Credit and Lifetime Learning Credit. Please refer to your tax advisor or financial advisor for inquires – we cannot supply tax advice.

 

What information is provided on the 1098-T?

The CCSNH reports on Box 2. Amounts Billed for Qualified Tuition and Related Expenses and Box 5, Scholarships and Grants, as well as Boxes 4 and 6, Adjustments for Prior Years. If the scholarships and grants total more than the eligible charges, a 1098-T will not be processed, as there will be no tax credit to claim. In addition, if a student’s tuition is fully paid by a Third Party, then a 1098-T will not be processed. Non-credit tuition, housing and meal plans are not qualified expenses.

 

Why aren’t all my payments showing on my 1098-T?

The CCSNH reports on charges billed on a student’s account within that calendar year, for terms in that calendar year, and the term commencing within the first 3 months of the following calendar year. If a student registers for the Spring Term prior to December 31st of that year, then the charges will appear on the current year’s 1098-T. The same will be for any charge or payment on the student’s account."

 

That answers a few questions and I think I have a little better understanding now.  I hope this might help others, as well.

 

Edited August 28, 2017 by Nancy in NH

[Ann.without.an.e]

I don't understand how Duke can NOT send out the IRS statements...? Even if your DD's scholarship is "full tuition", so that all of it goes to qualified educational expenses. DS#1 here had partial scholarships for tuition, and we still received the 1098-T forms...

 

The only thing I'm seeing about colleges not sending the 1098-T is the IRS waiving the penalty for college in certain circumstances from 2016 -- nothing about no longer not requiring colleges to file the forms.

 

 

I think it is honestly up to the school to decide whether to include it as 1098T income.   They see it as proof that you earned a credit and if you didn't earn the credit then they do not report it, but I honestly may just be confused and dd's FA might be confused too  :confused1:

Edited August 28, 2017 by Attolia

[Ann.without.an.e]

I found it on the IRS website....

 

"Exceptions. You do not have to file Form 1098-T or furnish a statement for:

Courses for which no academic credit is offered, even if the student is otherwise enrolled in a degree program;

Nonresident alien students, unless requested by the student;

Students whose qualified tuition and related expenses are entirely waived or paid entirely with scholarships"

 

 

DD's entire expense is paid entirely by a scholarship and therefore she will not receive a 1098-T.  

Edited August 28, 2017 by Attolia

[Lori D.]

Thanks to all who found those informational excerpts on the 1098-T. ?

However, I don't see how the fact that colleges aren't required to provide some sort of form with a $$ break-down of where the different parts of the scholarship go helps families determine what has to be declared as student income for the taxable portion of scholarships???

Edited September 17, 2018 by Lori D.

[Nancy in NH]

Thanks to all who found those informational excerpts on the 1098-T. :)

 

However, I don't see how that helps families determine what has to be declared as student income for the taxable portion of scholarships???

 

For me, it didn't answer all my questions, but it was helpful because I now know how DS's school handles reporting (apparently, in box 2 for billed amounts) on the 1098-T, which was one of my questions.  But apparently, it is more important to keep our records straight, since there can be discrepancies between the 1098-T and our records.  It also explains better for me what I was dealing with last year, when DS withdrew and the 1098-T reported (in box 2), billed amounts and in another box scholarships/grants that weren't the true picture.  The CPA we fired was trying to convince me to claim the entire amount of tuition in box 2, which was twice what actually was paid (scholarships were doubled as well), so that we "could get the full education credit".  What we ended up reporting was what in fact was paid and awarded and resulted in a much lower credit.

 

I am still a bit confused  :confused1:  and have more questions, which I posted above (post #5) and where I explained a bit more about the situation.  As I mentioned, I expect there will not be any taxable portion of the scholarships, since the awards are going towards tuition, fees, and books only and there will be no excess funds left over.  I'll probably just pay the spring 2018 tuition in December and then it will all neatly fit into this tax year.  Seems to makes sense--consider money in and money out in the year it happened.

[Lori D.]

On 8/27/2017 at 7:12 PM, Attolia said:

I found it on the IRS website....

"Exceptions. You do not have to file Form 1098-T or furnish a statement for:
Courses for which no academic credit is offered, even if the student is otherwise enrolled in a degree program;
Nonresident alien students, unless requested by the student;
Students whose qualified tuition and related expenses are entirely waived or paid entirely with scholarships"

DD's entire expense is paid entirely by a scholarship and therefore she will not receive a 1098-T.  

But from the IRS' point of view, I would think that the room & board portion of her expenses is not a qualified educational expense, and would have to be accounted for on DD's tax return as income, even if no money passed into her hands/bank account...?

I'm not trying to complicate this for you and for OP ( ? ), but remembering back to DS#1's partial scholarship: it showed up on his college webpage as a tuition credit -- no check came in the mail -- and we did receive a 1098-T, and we did make sure that the amount was shown on the tax return as covering a qualified educational expense to make sure that it did not get declared as income... 

Edited September 17, 2018 by Lori D.

[Pegasus]

A few things for clarity:

 

1. Keep your own records!  Schools report differently on the 1098-T and you do NOT need to report those values on your taxes as long as you have your own records to back it up.

 

2. Any grants/scholarships (not loans! I know that wasn't mentioned here but some people think they need to report loans on their taxes.) that are RECEIVED in the 2017 calendar year (posted to student account or given directly to the student) are counted in that year, regardless of when you spend them.  Any amount DETERMINED BY YOU not to be applied to qualified expenses is taxable TO THE STUDENT (given that the grant/scholarship doesn't specify where it must be applied).

 

3. If the Spring 2018 bill appears on the student portal in 2017 but isn't due until 2018, it is UP TO YOU when to pay it so evaluate when it would be most beneficial to your specific tax situation.

 

4. It is often beneficial to allocate a portion of the scholarship amounts to non-qualified expenses (even if you have room to allocate it to qualified expenses) and have the student pay taxes on it in order for the parent to claim the maximum AOTC. That's because the tax credit is larger than the tax obligation.  This is allowed, per the IRS, and there is a nice governmental paper written on how to go about it that I've posted before. I'll see if I can find it again and post the link. Even if the student is living at home, you can claim amounts for transportation, personal expenses, etc. as non-qualified expenses for this purpose. The school's "total cost of attendance" estimates are good back-up documentation for the amounts you use.

 

https://www.treasury.gov/connect/blog/Documents/Pell%20AOTC%204%20pager.pdf

 

5. Don't rely on a tax preparer or accountant to understand any of this. You are much better off researching it for yourself.  The software companies usually do a fair job as well but you need to understand how it should work in order to verify that the software package is treating it correctly. 

 

Good luck!

 

Disclaimer - I am not a tax or education expert. Just a parent who has waded these waters before. Use any of the above information at your own risk.

[Julie of KY]

By the way, the school cannot tell you "all" your qualified expenses. They can tell you tuition and fees, but the amount you spend on required books and supplies will vary and this counts as qualified as well.

[Nancy in NH]

Thanks!  This clarifies a lot for me and is what I suspected.  After dealing with a CPA last year who had NO CLUE, I realized I was better off handling this myself.  I especially appreciate the advice in #4 of your post--it is something I would not have otherwise considered.

 

No worries!  Will take advice and proceed with caution.  I'll add to it a Lindt chocolate bar and a nice glass of wine when tax time comes!

 

A few things for clarity:

 

1. Keep your own records!  Schools report differently on the 1098-T and you do NOT need to report those values on your taxes as long as you have your own records to back it up.

 

2. Any grants/scholarships (not loans! I know that wasn't mentioned here but some people think they need to report loans on their taxes.) that are RECEIVED in the 2017 calendar year (posted to student account or given directly to the student) are counted in that year, regardless of when you spend them.  Any amount DETERMINED BY YOU not to be applied to qualified expenses is taxable TO THE STUDENT (given that the grant/scholarship doesn't specify where it must be applied).

 

3. If the Spring 2018 bill appears on the student portal in 2017 but isn't due until 2018, it is UP TO YOU when to pay it so evaluate when it would be most beneficial to your specific tax situation.

 

4. It is often beneficial to allocate a portion of the scholarship amounts to non-qualified expenses (even if you have room to allocate it to qualified expenses) and have the student pay taxes on it in order for the parent to claim the maximum AOTC. That's because the tax credit is larger than the tax obligation.  This is allowed, per the IRS, and there is a nice governmental paper written on how to go about it that I've posted before. I'll see if I can find it again and post the link. Even if the student is living at home, you can claim amounts for transportation, personal expenses, etc. as non-qualified expenses for this purpose. The school's "total cost of attendance" estimates are good back-up documentation for the amounts you use.

 

https://www.treasury.gov/connect/blog/Documents/Pell%20AOTC%204%20pager.pdf

 

5. Don't rely on a tax preparer or accountant to understand any of this. You are much better off researching it for yourself.  The software companies usually do a fair job as well but you need to understand how it should work in order to verify that the software package is treating it correctly. 

 

Good luck!

 

Disclaimer - I am not a tax or education expert. Just a parent who has waded these waters before. Use any of the above information at your own risk.

 

[Nancy in NH]

The woman in the bursar's office today told me that the 1098-T would not go out (though would be posted to the student's account) if scholarships meet or exceed what was owed for the year, verifying what I had previously learned on the school's website.  She made a comment that it would say something like "not qualified for tax credit" or something like that.  But as some have mentioned, the school cannot know everyone's particular situation and some circumstances are not the norm (like DS's), so it's up to us to keep accurate records and report was is applicable to the tax year at hand.

[JeanM]

I appreciate all the information here. DH and I spent a ridiculous amount of time planning how to pay ds's fall bill. We were trying to maximize our tax credit, make sure that 529 money was used for 529-eligible expenses, etc. His school breaks down his scholarships so that one small one is specifically for room/board, and the big one is for tuition, etc. The big one doesn't cover all of tuition, so by using our money (not 529 funds) for that portion, we can claim a tax credit. I sure hope we did everything correctly!

[Nancy in NH]

I appreciate all the information here. DH and I spent a ridiculous amount of time planning how to pay ds's fall bill. We were trying to maximize our tax credit, make sure that 529 money was used for 529-eligible expenses, etc. His school breaks down his scholarships so that one small one is specifically for room/board, and the big one is for tuition, etc. The big one doesn't cover all of tuition, so by using our money (not 529 funds) for that portion, we can claim a tax credit. I sure hope we did everything correctly!

 

I can appreciate and sympathize with your comment about spending "a ridiculous amount of time planning"!  I didn't realize I'd have to become a self-taught CPA when my kids hit the college years.  Ugh!   :banghead:

[Lori D.]

On 8/28/2017 at 4:53 AM, Pegasus said:

A few things for clarity:

1. Keep your own records!  Schools report differently on the 1098-T and you do NOT need to report those values on your taxes as long as you have your own records to back it up.

2. Any grants/scholarships (not loans! I know that wasn't mentioned here but some people think they need to report loans on their taxes.) that are RECEIVED in the 2017 calendar year (posted to student account or given directly to the student) are counted in that year, regardless of when you spend them.  Any amount DETERMINED BY YOU not to be applied to qualified expenses is taxable TO THE STUDENT (given that the grant/scholarship doesn't specify where it must be applied).

3. If the Spring 2018 bill appears on the student portal in 2017 but isn't due until 2018, it is UP TO YOU when to pay it so evaluate when it would be most beneficial to your specific tax situation.

4. It is often beneficial to allocate a portion of the scholarship amounts to non-qualified expenses (even if you have room to allocate it to qualified expenses) and have the student pay taxes on it in order for the parent to claim the maximum AOTC. That's because the tax credit is larger than the tax obligation.  This is allowed, per the IRS, and there is a nice governmental paper written on how to go about it that I've posted before. I'll see if I can find it again and post the link. Even if the student is living at home, you can claim amounts for transportation, personal expenses, etc. as non-qualified expenses for this purpose. The school's "total cost of attendance" estimates are good back-up documentation for the amounts you use.

https://www.treasury.gov/connect/blog/Documents/Pell%20AOTC%204%20pager.pdf

5. Don't rely on a tax preparer or accountant to understand any of this. You are much better off researching it for yourself.  The software companies usually do a fair job as well but you need to understand how it should work in order to verify that the software package is treating it correctly. 

THIS! This is exactly what we did, and what my thinking was about some sort of record from the school about the amount you actually pay for tuition & fees.

We kept our own records of payment, but it's helpful to at least print off the financial cost sheet from the school -- or at least a screen shot of the financials from the student's college web page Required books. We bought a lot of books used online, so we kept receipts for totaling  up required book expenses.

DS only had partial scholarships, but we also were having to wrangle savings bonds and the ESA funds... Previous poster is right: it's like having to become your own tax accountant to keep everything straight. ?

Edited September 17, 2018 by Lori D.