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Are Scholarships Taxable and Pell Grant?

srobinsrobin Posts: 95Registered User Junior Member
I have several questions

1. Are scholarships taxable?
2. Since I still claim my son on my taxes is it listed as his income or counted towards mine?

3. Will he get W-9s for all scholarships or just some?

4. DS has tuition already paid for all 4 years thanks to generous scholarship from his university. Can some of his Pell grant money be used towards transportation expenses? He is working this summer to try and buy his first car. My brother keeps telling me that they will send a check for any money that is left over. My son also accepted the loan package they gave him. He may not need it his freshman year but will probably need it next year. Is there any penalty for not using the loan the first year?
Post edited by srobin on

Replies to: Are Scholarships Taxable and Pell Grant?

  • sblake7sblake7 Posts: 1,691Registered User Senior Member
    1. Scholarships in excess of tuition, required fees, and (some) required books are taxable.
    2. Son will get a 1098-T from the school that shows what the amount in excess of required fees is. It's all his income.
    3. In our experience, we got just the one from the school-- but that didn't involve outside scholarships, so I don't know if they issue 1098's or equivalent.
    4. No penalty for not taking out the loan. Not sure if you can add Pell to full tuition scholarship.
  • swimcatsmomswimcatsmom Posts: 15,013Registered User Senior Member
    Pell can be used toward anything in the school's COA. My daughter has a full tuition waiver scholarship plus a cash scholarship. She still gets the Pell and uses it for living expenses. That makes the Pell grant taxable income to her (not me). She does no get a W9 but a 1098T from the school that shows her scholarships and grants.

    She lives off campus so all he scholarships/grants/any loans are first credited to get bursars account. All the direct school charges are debited to the account. Any excess is paid to her after the add/drop period and she uses it for living expense - rent/food etc.
  • sk8rmomsk8rmom Posts: 5,746Registered User Senior Member
    Here's a link to the IRS pub explaining tax issues, qualified expenses, etc. I found it useful to set up a system to categorize and record each expense to simplify things at tax time. The 1098 your S gets will likely not include enough info to file correctly, so you may want to do the same,
    Publication 970 (2008), Tax Benefits for Education

    Also, You might find this article informative:
    Navigating the Form 1098-T Tuition Statement: Inconsistencies in Reporting
  • MHC2011MHC2011 Posts: 287Registered User Junior Member
    I had one scholarship (only $2,500, fortunately) that ended up getting taxed because I got a 1099 for it, something I was pretty upset about but had to go along with anyway. Otherwise, I didn't pay taxes on anything.
  • sk8rmomsk8rmom Posts: 5,746Registered User Senior Member
    MHC, just to clarify, only the portion that exceeds the allowable expenses you paid is taxable. They send a 1099 for the full amount but you still have to offset it with the correct expenses. So, it didn't (or shouldn't) get taxed because they sent a 1099, but because it exceeded the amount you paid for "qualified" expenses (tuition, fees, books, supplies, and equipment).
  • MHC2011MHC2011 Posts: 287Registered User Junior Member
    sk8rmom, no, it ended up with me having to pay taxes on it even though the funds went directly to tuition. It was because the scholarship organization listed recipients as subcontractors, making it count as income under the tax code. It was something like they had checked box 3 when it should've been 7, or 7 when it should've been 3...I can't remember. But it wasn't a mistake; that's actually their policy. Apparently they're not the only one that does that, and they're a pretty major scholarship provider. :/
  • sk8rmomsk8rmom Posts: 5,746Registered User Senior Member
    Was this, by chance, a company you or your parents work for? There are some special rules for company scholarships, because they can be viewed as a fringe benefit, but otherwise Pub 970 rules apply to all other scholarships. IRS guidance on company scholarships can be found here:

    Company scholarship programs

    Not to be nitpicky, but for clarification of other readers, boxes 3 and 7 of Form 1099 are not "checks" but amounts (other income and nonemployee comp). Did you ask a tax professional about this? If it's not a company scholarship, it doesn't seem that it should have been taxable if it was used for a qualifying expense like tuition. You might call the IRS help line at 1-800-829-1040 - you can always amend your return.
  • MHC2011MHC2011 Posts: 287Registered User Junior Member
    Nope, parents are in no way affiliated. (I'm also legally independent, even though that doesn't really matter when it comes to parental affiliation, assuming that had applied in this case.) My accountant went over this at length with the scholarship provider and there was no way the provider was going to budge on it. They also said they get complaints every year but will not be changing the way they do things.

    What made things stranger is that I've received three scholarships through the same organization, and they only did things this way with one of the scholarships (the largest, at $2,500).

    Your advice about the IRS help line is good, so maybe I will try that. But I'm afraid that since my (exceptional) accountant has already worked with the organization so much, the answer's going to be the same. Oh well. :(
  • sk8rmomsk8rmom Posts: 5,746Registered User Senior Member
    I'm sure your tax guy knows his stuff, but may be choosing the most conservative route in order to avoid potential audit. Or, he may have been able to offset this "income" with a tuition deduction, or Hope/Lifetime Learning credit. Since this seems to be a renewable scholarship, you may want to take the time to understand the tax implications.

    Imho, no one who has adequate documentation should file their taxes incorrectly, and in a way that penalizes them, due to an error/misinterpretation of the tax code on the part of another. If you look at the instructions for Form 1099 (available on the IRS website), you'll see that it says quite specifically that it is not to be used for scholarships.

    The IRS is very clear on the rules for scholarship taxability, both as to what qualifies and who determines:

    The recipient is responsible for determining how much of the award was used for qualified tuition and related expenses so as to be tax-free. You should maintain records (e.g., copies of bills, receipts, cancelled checks) that reflect the use of the scholarship money.
    Scholarship award can't be payment for services.

    If you do call the IRS, and they give tell you to amend, keep a complete record of your call (date, time, person responding, question asked, response given). Don't be afraid to ask them to repeat if you need to! If a question comes up later on about the amended return, this info will be useful.

    If you'd like more specific info, here's a thread started by an expert in this area. It has more complete info and references to IRS rulings on the subject.
    http://talk.collegeconfidential.com/parents-forum/57955-tax-aspects-scholarships-fellowships.html
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