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Outside scholarships and tax liability

newparentnewparent Posts: 271- Junior Member
edited January 2007 in Parents Forum
Outside scholarships and tax liability relationship

http://www.fao.fas.harvard.edu/downloads/understanding_your_award.pdf
FAQ: Is it true that my scholarship is counted as taxable income?
Answer: In some cases, part of it will be taxable. If your total scholarship and grant assistance from all sources for a tax year exceeds the amount for tuition, fees, books and supplies, that excess amount is considered by the IRS to be taxable income.

My question: This question is based on tax liability if a student your total scholarship and grant assistance from all sources for a tax year exceeds the amount for tuition, fees, books and supplies, that excess amount is considered by the IRS to be taxable income.

Hypothetically, a student receives outside scholarship of $10,000; and $ 28,000 for need based grants from the college and $7000 for parents EFC. Suppose tuition, fees, books and supplies cost around $35,000. In that case, excess $3,000 (10,000+ 28,000 - 35,000) received in scholarship is then taxable, as it would be used for room and board.

I am aware that it is better to receive $3,000 towards room and board from outside scholarship and still pay taxes on that income. But I am trying to understand the tax liability. Thanks for your input.
Post edited by newparent on

Replies to: Outside scholarships and tax liability

  • newparentnewparent Posts: 271- Junior Member
  • somemomsomemom Posts: 9,263Registered User Senior Member
    I am not sure what you are asking, but basically, despite the fact that if your DD or DS goes away to school you just pay for them to live, any scholarship/grant $ received beyond the tuition & fees is going to show up as taxable on the 1078T (?) from the school. It is up to you to track books and such, but you may have to pay taxes on the money going toward living expenses. I don't think many people getting "full-ride" financial aid from expensive privates think about this, I have never heard any one on this board talking about it, so i am not sure what happens when the tax liability is four figures. I have heard that sports scholarships are not taxable though academic merit $ are. I cannot verify whether that is exactly the way it works, but that's what I have heard.
  • maritemarite Posts: 21,586Registered User Senior Member
    I am no expert, and perhaps the question is best posed on the finaid board.

    However, I would suspect that the $10,000 would be used to reduce EFC of $7,000. So you are right that tax would be levied on the remaining $3,000.
  • itstoomuchitstoomuch Posts: 1,745. Senior Member
    IRS publicatin 970: Tax Benefits for Education.

    Your child's taxes on $3000 is a small price to pay in relation to the $10,000 outside scholarship and to the $7000 that does not come from your working effort. Congratulations are in order?
  • newparentnewparent Posts: 271- Junior Member
    itistoomuch :
    Hypothetically, a student receives outside scholarship of $10,000 /

    It is a hyothetical question, there is no such $10,000 scholarship so far in reality. Kid is applying few scholarships. But they are hard to come by. So far it is just a dream and no concrete offer in real way. But thanks for the IRS publication 970 quote.
  • itstoomuchitstoomuch Posts: 1,745. Senior Member
    Good Luck.

    Alternative explanation and illustrative affects can be found in popular and inexpensive tax programs. Even a tax program that's 5 years old will get you a very good illustration.
  • saxsax Posts: 4,351Registered User Senior Member
    www.irs.gov/pub/irs/pdf/p970.pdf

    Basically tuition, mandatory fees, and books are not taxable. Just about everything else is. I figure student can max out IRA contribution to lessen taxes.

    Link not working...hmmm. Its for 2005 taxes...can't imagine it has changed that much. Go to main IRS site and search Tax Benefits for education.
  • originaloogoriginaloog Posts: 2,645Registered User Senior Member
    newparent, your post #6 hit the nail on the head. These large outside scholarships are very hard to get given the huge number of applications they receive. Our son, while very serious in his merit college search, never considered applying for one of the big outside scholarships. He was offered a total of $376,000 in merit aid but it was all college sponsored money.

    I suspect that if you totalled the number of hours students spent applying for the major outside scholarships(those >$5000/yr for 4 years) that it would come out to less than $1/hr, long odds indeed.

    I believe that scholarship sponsors should publish data about the number of scholarships offered, the number of applicant and a range of awardee qualifications(gpa, class rank, SAT scores) if these are used in the selection process.
  • xiggixiggi Posts: 22,779Registered User Senior Member
    I have never heard any one on this board talking about it, so i am not sure what happens when the tax liability is four figures. I have heard that sports scholarships are not taxable though academic merit $ are. I cannot verify whether that is exactly the way it works, but that's what I have heard.

    I have posted on this issue many, many times. When the search feature is reestablished, do a search on "taxability of scholarships" on CC.

    Without getting in excessive details, the theory is the follwoing: ALL SCHOLARSHIP money is taxable, but you are entited to deduct a number of items for college expenses. As mentioned above, expenses such as room and board, travel allowances, and reimbursement of personal expenses --which are typical included in a full aid package that covers the entire COA-- are NOT deductible.

    One bit of good news is that scholarship income does NOT have an impact on the FAFSA calculation nor does work study income. All other income does have an impact to the student contribution up to the 3,000 allowance.

    At the end of the day, a student who receives a full aid scholarship will owe some taxes, and depending if a case can be made for paying taxes as an independent or dependent should owe several hundreds dollars.

    One annoying issue is that such student's situation is further complicated by his or her inability to work to pay the tax liability without incurring more taxes as well as a reduction of his or her grants.

    All in all, it is rather dumb situation in which te government offers grants such as the Pell and SEOG, but then expects students to pay taxes at a time when it is very hard to earn money without triggering further complications. For this we can thank the government that were in charge in the late eighties and nineties.

    Legislation has been introduced by Rep. English to correct the taxability issues of room and board, as well as a few other inequities. The approach of the proposed laws is to simply extend the deductibility of college expenses.

    And, fwiw, the difference between athletic, need, and merit aid is not very well established.
  • cptofthehousecptofthehouse Posts: 24,609Registered User Senior Member
    Athletic scholarships are treated as any awards. The same tuition, books,etc exclusions apply, but other items are taxable. There was some argument that room and board should be deductible for those athletes that have to live where the college stipulates, since they have no choice in the cost of lodgings. I did not think that it went through.
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