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Scholarships/grants as taxable income?

sbjdorlosbjdorlo Posts: 3,182Registered User Senior Member
From one of my son's school's financial aid brochures:

IRS tax rules consider grant and scholarship amounts you receive that are in excess and tuition and the cost of required books and supplies to be taxable income. Each year you will be notified of the amount of such income to report on your federal tax return, if applicable.

So, is this saying that any grant over the amount of tuition, books, and supplies (and how does the IRS know the cost of books and "supplies", by the way?), will be considered income for my son? And do colleges then add that income for the following year, thereby decreasing the grant?

What about the cost for room and board? Why wouldn't the IRS include that?

Financing college seems waaaaaaaaaaaaaaay too complicated.
Post edited by sbjdorlo on

Replies to: Scholarships/grants as taxable income?

  • entomomentomom Posts: 23,658Registered User Senior Member
    how does the IRS know the cost of books and "supplies", by the way?

    They don't, this is like many other things on your taxes, you need to keep records in case you are audited.
    And do colleges then add that income for the following year, thereby decreasing the grant?

    No, each year each college uses an estimate for the cost of books & supplies when they calculate the COA, you should be able to see that in your FA package.
    What about the cost for room and board? Why wouldn't the IRS include that?

    R & B are not included as a qualified educational expense, see page 5:

    http://www.irs.gov/pub/irs-pdf/p970.pdf

    Yes, and it gets more complicated. Depending on your circumstances, sometimes if the grant/scholarship money does not specify where it is to be applied (tuition or R&B), it may be advantageous for the student to apply it first to R&B and pay higher taxes on it, but enabling the parents to take one of the Education tax credits.
  • jannahickeyjannahickey Posts: 213Registered User Junior Member
    Yes, any scholarship or grant over and above tuition and books is considered taxable income. My daughter had to pay taxes this year due to a $9000 overage. We were not aware if that either until I did my taxes and this came up. The cost of books is an estimate but if you are audited you will need to provide proof of the costs so I would keep it accurate.
  • sbjdorlosbjdorlo Posts: 3,182Registered User Senior Member
    entomom,

    Can I assume the education credit is only for tuition then? If that's the case, what you said makes sense because at least you'll have 2,500 tax credit, correct? I'm looking at one grant right now and it's about 8K over tuition.
  • njbluenjblue Posts: 100Registered User Junior Member
    The school will provide you with a 1098t form at the end of the year which will list scholarship and grant money and the amount of "qualified tuition and related expenses".
    The difference between the two is what the student will pay taxes on. It counts as income. If the student received a pell grant the first year they may not receive it the next year because of the "income" they received. Also the parents cannot claim the tax credit if the scholarship is a full ride since they are not paying anything to the school.
  • entomomentomom Posts: 23,658Registered User Senior Member
    Can I assume the education credit is only for tuition then?

    Yes, for example, look on page 9 of publication 970, it describes qualified educational expenses for the AOC.

    You need to try it both ways, to see which is advantageous for you tax-wise. For example, assume:

    35k tuition
    2k books
    = 37k qualified expenses
    10k R&B
    43k grant

    1. Your S applies the grant to tuition/fees/books first; he has to pay taxes on the 6k that is over qualified expenses. You get no tax credits.

    2. Your S applies the grant to R & B first and then to tuition/fees/books; he has to pay taxes on the 10k that is over qualified expenses. You get tax credits based on the 4k that you paid for qualified expenses.

    Everybody, please check my math and assumptions, I hope I have this correct!
  • mom2collegekidsmom2collegekids Posts: 62,443Registered User Senior Member
    Schools do not include scholarships and grants from the previous year as "income" that would lower aid for the next year. That wouldn't make any sense.
  • njbluenjblue Posts: 100Registered User Junior Member
    The scholarship money that exceeded the qualified tuition and related expenses is reported as income on the students tax return and may affect federal aid. D's scholarship is a full academic scholarship so it doesn't affect her (and she never qualified for pell grant) but it may be a concern for other students
  • swimcatsmomswimcatsmom Posts: 14,998Registered User Senior Member
    ^^Taxable scholarships/grants do not affect federal aid for the next year. The taxable scholarship/grant is, as you say, included in income that is reported on FAFSA. But FAFSA has a separate question, 43d, that asks how much taxable scholarship/grant income was included in the student AGI. In the EFC formula, the answer to question 43d is used to reverse the taxable scholarship/grant income out of income before the EFC is calculated. (ditto for work study income and question 43c).
  • juilletjuillet Posts: 5,893Super Moderator Senior Member
    To add to the chorus, I had a scholarship that covered tuition, fees, room, and board and I had to pay taxes on the room and board portion. It was never that much - I think the most I paid was about $600 one year (in GA).
  • proudmom1313proudmom1313 Posts: 116Registered User Junior Member
    So if your child has a scholarship that covers tuition and you pay books/room board, etc. -- you can still get the $2500 tax credit?
  • Kdog044Kdog044 Posts: 1,452Registered User Senior Member
    So if your child has a scholarship that covers tuition and you pay books/room board, etc. -- you can still get the $2500 tax credit?
    If the scholarship is specifically earmarked for tuition you can only claim the book expenses towards the education credit. Room and board is not a qualified expense. What the other posters are saying is if a scholarship is NOT specifically stated to be used for tuition you can apply those dollars towards room/board and claim the tuition expense. You will need to claim the scholarship as income on the student's federal taxes though.
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