Here is my problem, I am getting 25,000 (from a variety of sources) dollars for my freshman year at Texas Tech, Tuition and mandatory fees is 9,500 and books will probably cost a 1,000. Every year except my first year I get 7,500. I am going to graduate in 4 years with a masters. So I get 47,500 overall which basically covers all my tutition fees and books for all four years. My parents tax rate is 33% and I don’t work. I don’t want to spend a lot of tax dollars on my scholarships now when I won’t use them until later. How do I avoid this? All the scholarship money is going to an account at Texas Tech and I will never see a dime of the extra money my freshman year. What can I do?
Is their any way I can avoid taxes if I get a large scholarship that I intend to use for later years
In this world nothing can be said to be certain, except death and taxes.
Benjamin Franklin
First…you will pay taxes each year on any amount that is not for a qualified educational expense.
So how much will you actually receive in 2015. Then how much in 2016…how much above the amounts for tuition, fees, books, and other qualified educational expenses?
Oh…and you need to count the amount disbursed to your Texas tech account that is in excess of qualified educational expenses.
Why wouldn’t you be seeing any of this at all your freshman year? Most schools will give you the option of a refund if there is excess money on your bursars account.
If you are getting funding from outside sources why don’t you explain to the funders that you don’t need the money Freshman year and ask them to defer the payment until you do need it?
I get half of it each semester. So about 7,500 each tax year. If I don’t get the check this year I don’t get it at all. It’s a
valedictorian tuition and fees waiver from the state, 2,000 miscellaneous, 7,500 automatic based on SAT, and a 7,000 freshman bonus.
Are you commuting to the school? What is the COA of TT for a commuting student? If you only have tuition, fees and books to pay, will you still get the whole amount of the scholarship if it exceeds COA?
Otherwise they might have to reduce the scholarship the first year. The following years you are going to be about $2,500 short. Do they have a provision for cases like that where the COA might be less than the first year scholarship amount?
If your only income is that $7500 a year, you will not be paying taxes on that whole amount
If the $7,500 barely covers tuition you shouldn’t have to pay any tax at all. Qualifying expenses (QEE) are tuition, fees and books. Scholarships and grants in excess of QEE are taxable income.
That’s the issue with the first year scholarship. But if you are commuting and the $25,000 exceeds the COA then I think the amount will have to be reduced.
You pay taxes on the amount you receive in that tax year. The IRS is not flexible about that. However, you will receive a $6200 standard deduction (maybe $6300 for 2015?) so you won’t pay taxes on the QEE for tuition, fees, and costs, and you’ll get that extra $6200 tax free. After that, you’ll pay taxes on it at that 33% rate. If you can get them to give you the $25,000 for freshman year in two payments, Aug and Jan, you’ll be better off because the Jan money can be used for spring 2016 and that will be the same tax year as fall 2016 if you don’t spend it all.
I’m not sure if a fee waiver/tuition reduction counts as taxable scholarship money. That’s your tuition rate (say $5000 rather than $10,000. Fees that aren’t charged aren’t charged. I don’t know how the 1098T will read, that you paid $10000 in tuition and received a $5000 grant or just that that didn’t happen and tuition was $5000.
In rereading your first post, you say the money is going to an account. What happens to it if you don’t go to Tex Tech? Do you forfeit it? If so, it’s not yours and hasn’t been disbursed to you. It won’t show up on your 1098T or on your student account until it is disbursed.
“My parents tax rate is 33% and I don’t work.”
Depending on how things shake out for each tax year, you may or may not be a tax dependent in any given tax year. In either case, you will file your own tax return, and your parents’ tax rate will not determine your own.
Scholarship benefits beyond QEE (such as room and board) are classified as unearned income and as such are usually taxable at the parents’ rate.
Are you living on campus? If your scholarship awards (freshman year at $25k) are larger than the cost of attendance I do not think TTU will hold the money in an account for you for future years. Did you ask the university if they would do this or are you assuming they will?
Any taxable scholarships (room & board) are taxed to the student not the parent.
^^ taxed to the student but, as unearned income, it is subject to the Kiddie Tax (parent’s rate after the standard deduction of $6200)
^^ but doesn’t that assume that the student is still a tax dependent? At what point would the combination of earned and un-earned income add up to force (or at least permit) independent status? I’m almost certain that I have read here about parents losing their kids as dependents for taxes as a result of ginormous scholarships.
If the student is not claimed as a dependent on the parents’ return, it is taxed to the student and at the student’s rate.
But it is not optional to declare yourself independent. If the parents CAN claim the student as a dependent (full time student, under 24, parents supply more than half of student’s support), then the scholarship/unearned income is still taxes at the parents’ rate.
See Pub 501, page 15. Scholarships/grants are not taken into consideration when figuring whether the student provided over half their support.
http://www.irs.gov/pub/irs-pdf/p501.pdf
That means they aren’t counted as support the student provided themselves nor are they counted in total support for the student.
My point is just that if the student DOES provide more than half of his or her support, not counting FA, then he or she should not be listed as a dependent on the parents’ return.
The IRS does not allow scholarship $$ to count toward student provided support to become independent for tax purposes, even if the funds do actually provide 50% or more of that students support. So you end up with a dependent student who can be claimed on the parents return and you might as well claim the deduction - it can help offset your students kiddie tax bill.
Scholarships in excess of QEE are considered unearned income and are subject to kiddie tax. It is very unfair for the student who earned the scholarship to pay tax at their parents rate, but the IRS is not known for fairness, and IRS Publications 501 and 970 spell it out in all of its frustrating glory, LOL, They have figured out how to extract the maximum amount of tax from students, no matter how nonsensical and unfair it seems.
@annoyingdad has commented on many threads here on CC and has provided much valuable insight and advice for scholarship/tax issues - thanks@annoyingdad, BTW! it has been very helpful to me since I have a child with a full-ride scholarship and have struggled with preparing the resulting tax returns.
But if the student provides more of his or her own support through work earnings than his or her parents provide, the student should not be listed as a dependent on the parents’ returns, and the student will pay tax on the grant/scholarship income at his or her own rate.