We didn't take health insurance through the school. The fees they are charging, even if not QEE for our 529 (though they do appear to be) are pretty minimal. We spent way more out of pocket than we used 529 funds for. So should be okay there.
Mentioning school-billed health insurance was not done because I thought that applied to your situation. I was using it as an example to counter your apparent assertion that any fee required for enrollment is a 529 QEE.
Okay -- - our tax guy has completed DS' return. I have no idea if this is correct, but this is what he did on the 1040:
• $1600 reported on line 1 (summer job)
• $1750 listed on line 6 for the taxable scholarship (also listed on line 21 of Schedule 1 with description of SCH)
• Then he shows line 8 as a standard deduction of $1950 (unsure of where he got his; DS is being claimed as a dependent by us)
• This leaves $1400 as taxable income and so we wind up owing because he had very little withheld from his summer job.
Does this sound right? I'm scratching my head at this but maybe it is correct. Nothing reported on the form for the 529 stuff since we used disbursements for QEE.
@BelknapPoint and any other tax-savvy folks -- does this seem correct? Thanks.
Okay -- I see where he's getting the standard deduction. It's the greater of $1100 or $350 plus his earnings. Earnings were $1600 + $350 = $1950. This is because he is being claimed as a dependent by us. So no $12,000 standard deduction. Interesting.
Yes. So he earned $1600 from his summer job and had $6 withheld. $1750 is the scholarship. That's $3350 total income. $1950 is being used for his deduction. That leaves $1400 as the taxable portion of income. He's taxed at 10%. So he owes $134.
I'd pay $134 to get $1750 any day.
I think what I wasn't understanding is that the standard deduction for a single filing -- which is $12,000 --- does not apply if you can be claimed as a dependent by someone else.
Would love to know if this assessment sounds correct.
Generally, for the purpose of calculating a standard deduction for a dependent, the taxable scholarship amount should be treated as earned income and added to the wage income from the summer job. Based on the information you have provided, this would make the standard deduction for your son $3,700.
See the Standard Deduction Worksheet for Dependents on page 35 of the IRS 1040 Instructions for 2018.
Also, taxable scholarships should be included on line 1 of form 1040, as per the 1040 instructions on page 27.
Is your son declaring taxable scholarship income because the 529 distributions exceed the amount of adjusted qualified education expenses? Another way to handle this is to declare part of the 529 distribution as non-qualified and pay tax on the earnings portion of the non-qualified 529 distribution. However, the 529 earnings are not considered earned income for the purpose of determining a standard deduction for a dependent, so in your son's case and depending on the numbers, this may lead to a higher tax bill.
Edited to add: I went back and reviewed your previous posts. You state that the taxable scholarship is being explicitly used for room and board. The taxable scholarship amount should be included on line 1 of your son's 1040 with the notation "SCH" on the dotted line. See page 27 of the 1040 instructions. Your son's standard deduction as a dependent should be $3,700. Go back and talk to your tax guy.
@BelknapPoint Yes, the scholarship is being used for R&B exclusively. It's even noted as such on the bill from the university (e.g, $1750 partial scholarship for room and and board).
Got it -- line 1 is where it should be listed. That is a great catch. But how are you arriving at $3700 for the standard deduction? Is it the combined $3350 for earnings (all on line 1) + $350?
The IRS absolutely would not have corrected it. Their matching system doesn't care about scholarships. And if they did catch it, they'd have complained about it not being on the Wages line.
@BelknapPoint , @allyphoe and @thumper1 and others:
The questions continue. I went back to my tax guy. Cited page 27, etc. He changed that, so now on line 1 of the 1040, the scholarship is listed and noted as such with "SCH" on the dotted line and the amount of $1750. And he figured the deduction properly so tax liability is zero. Perfect. Except then he said he wasn't sure it should be added to earnings but will go with it -- and now that it is considered earnings, it impacts our state and local returns. Local: I called the tax service and explained the taxable scholarship issue. They asked what form it's reported on. No form I can tell other than the 1098-T. They said NOPE. Not reported/not taxable for local purposes. The STATE is much trickier and murkier. I can literally find nothing about scholarship income and whether it is taxable at the STATE level when it's considered non-qualified for FEDERAL purposes (e.g., room and board). I live in Pennsylvania. I read all 48 pages of the instruction booklet for the return form. I don't see a thing. I DID find a question posed on their site about someone having a full tuition scholarship, and the response was that it wasn't taxable. But it didn't distinguish that from a sch used for R&B that IS taxable by fed standards. So, totally stumped. Anyone have experience with the state of PA and this issue?
I'm not a tax preparer, but TurboTax included my D's taxable scholarship on line 1 with SCH next to it on the federal return, but didn't include it in income on the PA state return.
rev-758.pdf says:
"Are scholarships, fellowships or stipends taxable
for PA personal income tax purposes?
Generally, a scholarship or fellowship award made on the
basis of need or academic achievement is not taxable if
awarded to encourage or allow the recipient to further
educational development.
The award is taxable as compensation if given for past or
present services or in expectation of future employment.
For example, stipends paid to medical students for
internships and residencies approved by the American
Medical Association are taxable.
If not taxable, the award must still be included as
eligibility income on Line 9 of PA Schedule SP"
@Mommdc -- thank you. I literally copied and pasted the excerpt you cited above and fired it off to my tax preparer who then confirmed -- no tax due to the state of PA nor locally. The fact that PA is so vague about it and doesn't specify qualified/non-qualified re: what the scholarship is used for really made me think it wasn't taxable in the state of PA's eyes. This helps me for the next four years and with my other son when he goes to school.
Scholarships for room and board = taxable for federal. Not for state of PA. I'd really be sunk without this forum.
It is not -- and interestingly, if he had to file a state tax return in that state (he does not; he's a resident of PA), he'd be able to deduct the portion of the scholarship that was taxable on federal. Or something like that. This from my tax guy. We have reciprocity with this state, so everything goes through PA. Great question, though.
Replies to: What tax form is issued for scholarships?
Mentioning school-billed health insurance was not done because I thought that applied to your situation. I was using it as an example to counter your apparent assertion that any fee required for enrollment is a 529 QEE.
• $1600 reported on line 1 (summer job)
• $1750 listed on line 6 for the taxable scholarship (also listed on line 21 of Schedule 1 with description of SCH)
• Then he shows line 8 as a standard deduction of $1950 (unsure of where he got his; DS is being claimed as a dependent by us)
• This leaves $1400 as taxable income and so we wind up owing because he had very little withheld from his summer job.
Does this sound right? I'm scratching my head at this but maybe it is correct. Nothing reported on the form for the 529 stuff since we used disbursements for QEE.
@BelknapPoint and any other tax-savvy folks -- does this seem correct? Thanks.
I'd pay $134 to get $1750 any day.
I think what I wasn't understanding is that the standard deduction for a single filing -- which is $12,000 --- does not apply if you can be claimed as a dependent by someone else.
Would love to know if this assessment sounds correct.
See the Standard Deduction Worksheet for Dependents on page 35 of the IRS 1040 Instructions for 2018.
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf
Also, taxable scholarships should be included on line 1 of form 1040, as per the 1040 instructions on page 27.
Is your son declaring taxable scholarship income because the 529 distributions exceed the amount of adjusted qualified education expenses? Another way to handle this is to declare part of the 529 distribution as non-qualified and pay tax on the earnings portion of the non-qualified 529 distribution. However, the 529 earnings are not considered earned income for the purpose of determining a standard deduction for a dependent, so in your son's case and depending on the numbers, this may lead to a higher tax bill.
Edited to add: I went back and reviewed your previous posts. You state that the taxable scholarship is being explicitly used for room and board. The taxable scholarship amount should be included on line 1 of your son's 1040 with the notation "SCH" on the dotted line. See page 27 of the 1040 instructions. Your son's standard deduction as a dependent should be $3,700. Go back and talk to your tax guy.
Got it -- line 1 is where it should be listed. That is a great catch. But how are you arriving at $3700 for the standard deduction? Is it the combined $3350 for earnings (all on line 1) + $350?
If so, then he should have no tax liability.
Yes.
Part of me wonders if the IRS would have corrected it. hahaha.
The questions continue. I went back to my tax guy. Cited page 27, etc. He changed that, so now on line 1 of the 1040, the scholarship is listed and noted as such with "SCH" on the dotted line and the amount of $1750. And he figured the deduction properly so tax liability is zero. Perfect. Except then he said he wasn't sure it should be added to earnings but will go with it -- and now that it is considered earnings, it impacts our state and local returns. Local: I called the tax service and explained the taxable scholarship issue. They asked what form it's reported on. No form I can tell other than the 1098-T. They said NOPE. Not reported/not taxable for local purposes. The STATE is much trickier and murkier. I can literally find nothing about scholarship income and whether it is taxable at the STATE level when it's considered non-qualified for FEDERAL purposes (e.g., room and board). I live in Pennsylvania. I read all 48 pages of the instruction booklet for the return form. I don't see a thing. I DID find a question posed on their site about someone having a full tuition scholarship, and the response was that it wasn't taxable. But it didn't distinguish that from a sch used for R&B that IS taxable by fed standards. So, totally stumped. Anyone have experience with the state of PA and this issue?
rev-758.pdf says:
"Are scholarships, fellowships or stipends taxable
for PA personal income tax purposes?
Generally, a scholarship or fellowship award made on the
basis of need or academic achievement is not taxable if
awarded to encourage or allow the recipient to further
educational development.
The award is taxable as compensation if given for past or
present services or in expectation of future employment.
For example, stipends paid to medical students for
internships and residencies approved by the American
Medical Association are taxable.
If not taxable, the award must still be included as
eligibility income on Line 9 of PA Schedule SP"
Schedule SP refers to PA tax forgiveness.
Scholarships for room and board = taxable for federal. Not for state of PA. I'd really be sunk without this forum.
Some students are looking at a situation where they have to pay taxes to the state where they attend school.
I'm glad it isn't taxed in PA as well, especially since there is no standard deduction.