crazymomster

This question is really bugging me in the decision process of whether or not to reject outside scholarships.

The school's FA package covers tuition and room and board (but not fees). It does include a scholarship, a pell grant, and school grant.

First of all, are funds that cover room and board reported as income? Will the school say that their packaged scholarship is a room & board scholarship (nothing indicates that at this point) and therefore S will have to pay taxes on that and the school claim that the grant covers only the tuition?

The school will not allow S to "use" any outside scholarship and will directly reduce his FA package (the grant portion). If we decide to accept the outside scholarships, will these be considered income?

S is not allowed to use an outside scholarship to buy books with or any other supplies, etc. The school won't even allow him to buy a computer - if he wants money for a computer, they will give him a loan, and not allow him to use an outside scholarship to replace those funds.

So, in short: What funds are taxable and what funds are not taxable? I don't know what the 1098 T records and what we need to keep track of independently.

Next question is - will the school adjust future year's FA packages based on this year's (one time) outside awards? (is that a question for the school or is there a general answer?)

Thanks for any help.

swimcatsmom

I'm not sure exactly what you are asking, but I'll try.

Scholarships and grants are treated exactly the same as far as taxes are concerned. The source of the scholarships/grants does not make a difference (school or outside). If they are used to pay for qualified education expenses (basically tuition/fees/required books), they are not taxable income. If they are used to pay for non qualified expenses (such as room and board), they are taxable income.

The 1098Ts we have received do not specify what money went where. They just list total scholarship/grants, and total tuition/fees. We keep track ourselves and determine how to apply the various scholarships/grants/loans. One scholarship is a tuition waiver, so that has to be applied to tuition. The other scholarships/grants are not designated for any particular expense, so we decide how best to apply the money for us tax wise. This seems to be permissible based on the examples given in IRS 970.

crazymomster

oh yikes..... so any funding above and beyond tuition, fees, and books is taxable, correct? yes i think that's what you just said :-)

what about the purchase of a computer? is that a qualified expense - such as books? what about computer programs needed for class XYZ? (i would guess the school would supply them for free though if required, but i really have no idea.)

so then also presumably the funding that is above the qualified expenses will then also affect S's income so that when he applies for financial aid the following year, his income will be "high", right? or will they consider that they are the ones that caused his "high" income and not penalize him for his FA package?

thanks!

mom2collegekids

I think a computer is considered IF the school/class requires the purchase of one or a particular one. But, I don't think many schools have such a req't.

crazymomster

and pretty much every school has computers for student usage, so ok.... no "tax exempt" computer.

mom2collegekids

I wouldn't worry too much about any tax liability. It's the student who is being taxed and students don't really pay any federal taxes on about the first $5k or so. It's much better to get money and be taxed, then not to get it and have to pay for expenses..

No, money from scholarships/grants do NOT affect aid/EFC for the next year. That would be crazy. That would mean any kid who got a free ride to Harvard wouldn't qualify the next year.

swimcatsmom

No, the taxable scholarships will not affect his need the following year. On FAFSA, the taxable scholarships/grants would be included as income reported from the AGI. But there is another question that asks how much of the AGI is taxable scholarship/grant income. The answer to this question is used to reduce the income within the EFC formula so the scholarships/grants do not impact the EFC.

As far as computers, they are only allowed as a qualified education expense if all students are required to have one for a particular class/program. There are probably some classes that require it, but they are very few. (neither of my kids ever had a class that listed a computer as required, even though they certainly needed use of a computer to do the classes - I think there are specific disciplines that do make it a requirement).

You are still better off having a scholarship and paying taxes, than not having the scholarship. My daughter has had a tax bill every year because of taxable scholarships/grants. We pay the tax for her as all the grants/scholarships went on expenses - it is a lot cheaper than what we would pay without the grants/scholarships. A lot.

PhotoOp

I agree - the taxes are worth the scholarships. My daughter pays approx. $1,000 a year in taxes between her fed and state (she has to file two state income tax returns and luckily only one state taxes her scholarships). So when your kid gets a job make sure he/she has extra taxes deducted from his/her pay to cover those taxes - unless you can afford to pay the taxes yourself. We have been struggling with this concept with our daughter but I think she is finally on top of it. But $1,000 a year in taxes for $XX,XXX in scholarships - well worth it!

I don't understand what you said though about the college "won't allow" this or that. Outside scholarships are usually paid directly to the school but in the end when your kid files his tax returns he gets to decide what covered what.

crazymomster

^ What I mean is that the scholarships are not cash in his hand for him to buy books with, etc. They are cash in the school's hand for them to just pay out less in grants.

Yeah, we just figured out how much S will have to pay in taxes and it will be over $1000/yr. Umm, I'm sorry, but the reason he's getting such good FA is because we're poor, AKA, don't have $1000 to pay Uncle Sam just for his taxes, much less our own as well. Certainly though $1000+ is better than coming up with the room and board costs on our own :-).

Is there any sort of education credit or anything like that that he can use to lower his liability?

mom2collegekids

Yeah, we just figured out how much S will have to pay in taxes and it will be over $1000/yr

Do you live in a high tax state? Our kids have never paid that much and they have had very large scholarships.

How much will your son be earning?

How much are his room and board grants/scholarships?

How much will your son be earning thru W-S and maybe a summer job? (for a summer job, have him withhold more money.)

I find it hard to believe that other very low income kids are getting hit with $1000+ tax bills...unless they're paying the cost with summer jobs and such.

cptofthehouse

Did you take into account the tuition tax deductions and/or credits? It almost always comes out a wash.

MyOlaHome

I have a kid at a tippy top school and know a bunch of kids at other Ivy. Outside scholarships always replace school aid/grants first, then the family contribution. Some schools allow stacking, where the extra over room, board, fees, puter, and books is REFUNDED to the kid, or just sits in the bursar's account until used (bus pass, school bux, etc). Kid at Princeton got her new laptop included in financial aid package since she had to get loans, and the one at Tex A&M had it included so his outside scholarships paid for it - ran it through the school bookstore. That was handled by fin aid office by special request.

swimcatsmom

Mine did. I don't think it is that uncommon for kids that get good aid and that go to state schools where qualified tuition/fees are a smaller part of the COA than the non qualified expenses. My daughter had a good scholarship and had full need met with a combination of grants and loans. Her taxes on the taxable scholarships/grants were coming out to around $1,000+/- a year.

mom2collegekids

I don't think it is that uncommon for kids that get good aid and that go to state schools where qualified tuition/fees are a smaller part of the COA than the non qualified expenses

??? Swim what difference does that make?

If COA at Private School A = 50k.....40k in tuition and $10k in R&B

and COA at Public School B = $20k.....$10k in tuition and $10k R&B

What difference does it make? You still pay taxes on the R&B at either school.


BTW.......If you get full aid, how does someone qualify for tuition tax credit when you're not paying for tuition???

sylvan8798

Most schools seem to have programs like MATLAB available on certain campus computers accessible to those students who are registered in classes using them. Students pay a "computer services" fee along with the others. Otherwise, nothing is free.