<p>Total cost: $48,000 (Tuition $33,000, Room&Board&Others $15,000)
Family Contribution: $10,000
Grant and Outside Scholarship: $38,000</p>
<p>IRS defines the qualified expense is the Tuition $33,000; however, the award $38,000 is based on total cost. Would someone please show me which answer below is the correct one?
(a) The award $38,000 is deducted by R&B&O $15,000 so the remaining $23,000 is below the limit $33,000. Therefore, we are qualified for Tax Credits.
(b) The award $38,000 should cover Tuition first. Since it is greater than the limit $33,000 so we cant claim the Tax Credits.</p>
<p>In 2006, Jackie paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. </p>
<p>The terms of the scholarship state that it may be used to pay any of Jackie’s college expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring the tuition and fees deduction, she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition - $2,000 scholarship) in 2006. </p>
<p>Example 2.</p>
<p>The facts are the same as in Example 1, except that Jackie uses the $2,000 scholarship to pay room and board and, therefore, reports her entire scholarship as income on her tax return. In this case, the scholarship is allocated to expenses other than qualified education expenses. Jackie is treated as paying the entire $3,000 tuition with other funds, and can figure her tuition and fees deduction on the entire $3,000. </p>
<p>If we use method (a), we will pay more tax and get tax credits. On the other hand, we will pay less tax and forfeit the tax credits if we use method (b).</p>
<p>You will get a 1098T form at the end of the year which will also be reported to IRS. </p>
<p>The form has a field for “amounts billed for qualified tuition and related expenses” and a separate field for “scholarships and grants”. If the scholarships/grants number is higher than the qualified tuition number – you are likely to get questions from the IRS if you try to claim a tax credit for those expenses. It is also somewhat confusing because I think the income would need to be reported (and taxed) on your daughter’s return… whereas you probably want to take the tax credit on your own return – so it wouldn’t be readily apparent to IRS what you had done.</p>
<p>It is legal to deviate from the IRS forms if you have the documentation to back it up – I’m not saying that you can’t do it – it’s just that it’s not a whole lot of fun having to respond to thick letters from IRS demanding that you pay more taxes + penalties. </p>
<p>I think the scenario for “Example 2” makes sense for a student who is living off campus and has an outside scholarship – then the money is not showing up on the 1098T issued by the school, because it wen to the outside landlord rather than the college bursar. If all scholarship payments are going to the college bursar, then I think you should act on the assumption that the bursar will apply those funds first to the tuition.</p>
