OK you Financial Aid Pros- I'm a little confused

sybbie719 · January 15, 2005, 7:24pm

Ok, I 'm a little confused.

We received the finanical aid renewal paperwork from Dartmouth. There is a page Titled

TAX RULES FOR STUDENTS

WHICH SAYS:

For federal income tax purposes, earned income includes wages, tips and taxable scholarship. In order to determine whether or not you must declare some of your scholarship received in 2004 as part of this earned income, please read the following chart carefully. When you receive your W9s) for 2004, review your wages, tips and earned interest as welll as taxable scholarhip(if any) in order to determine if you will be required to file a federal income tax return (1040, 1040A or 1040EZ). Use the figures listed below to determine if you will have any taxable scholarship.

You must incluse the following as taxable income

Federal work study earnings
Scholarships from all sources (Dartmouth, Federal Pelll Federal SEOG, State Grads, Outside scholarships) in excess f the tutition and required books and fees . Use the chart below to calculate your taxable scholarship amounts

2004 Tax year

Winter $10,060
Spring $10,060
Summer $10,529
Fall $10,529

For example, if your total scholarshipfrom all sources was $11,00 in winter 2004, 940 would have to be declared as taxable income (11,000-10,060) . Consult your financial aid award letters from 2003-04 and 2004-05 (the 2 academic years in calendar year 2004) to determine the traxable amount from each enrolled term in 2004.

We paid the Winter 2005 tuition in 2004 (because we were billed and and the bill was due 12/15).

While this may not pertain to us, doesn’t it seem that this penalizes someone who may have a “0” EFC who ended up with a generous scholarship because that same scholarhip may be taxable income.

Parents who have gotten past year 1, does your child file their own taxes (summer earnings, scholarship $)or do they not file and are they still claimed as a dependent on yours?

If they are filing their own taxes does this mean that you can no longer include in your taxes the amount you paid for their tuition?

emeraldkity4 · January 15, 2005, 7:35pm

money receive for room and board is taxable
money you receive in excess of tuition and books and fees if they don’t make you give it back is taxable.
daughter files state income tax- and she doesnt make enough to file taxes, but she does so she gets some back- her scholarship doesn’t cover room and board- not taxable
you can still claim as dependent if you are providing over 50% of support.
You can choose who is recieving the hope scholarship ( which is really a credit or deduction can’t remember which) we have claimed the % off for the HOPE scholarship on our taxes - you can’t claim everything, just a percent and not more than $2,000

If you are getting a free ride inc room and board, you are still getting a good deal because( A) your tax bracket is likely very low and (B )tax on room and board in exchange for a $40,000 + education including rent and meals , isn’t too shabby!

sybbie719 · January 15, 2005, 7:47pm

I wish we were getting a free ride, but I can’t complain about what we have to pay when you consider that there are some families who get nothing.

I was wondering if she should have to file taxes for her summer earning/work study (she did not make a lot of money but made enough to covered her own student contribution). Our bill just add’s the cost of tuition/Rm board for a the term, then subtracts the amount of the scholarship then the balance is what I have ot pay. Then there is a stup to remit payment and a sheet if to describe any discrepancies in billing.

I thought that if she filed her own taxes, that I could not claim her as a dependent even if she lived over half the year with me and I provided over half her income. How is this handled for 2005 when they spend the better part of the year away at school and “not in your home”

emeraldkity4 · January 15, 2005, 7:53pm

I use a software program for taxes so it is fast and easy to see if it is worth it to file
If she would get money back- then file for sure- otherwise she won’t have to, but hte school will probably request copies of her tax forms and w-2’s anyway.
If she still recieves over half her support from you and she is still considered a dependent for ins purposes, than students who are away attending college, are not considered residents of where their college is, but she is still considered to be living with you , she is just away at school

<a href=“http://www.fool.com/school/taxes/1999/taxes990514.htm[/url]”>http://www.fool.com/school/taxes/1999/taxes990514.htm</a>

sybbie719 · January 15, 2005, 8:05pm

Thanks so much for the clarification. Just when I had it down pat for the first year, along comes the second.

anxiousmom · January 15, 2005, 8:19pm

Just in case it still isn’t clear. You do claim her as a dependent on your taxes, AND she files her own tax forms for her earnings.

jamimom · January 15, 2005, 10:49pm

Sybbie, you might want to google “federal tax”; college student. It’ll give you some sites that clarify that what Dartmouth sent to you. Unless your daughter has unearned income (which is generally investment income) of about $700 or so, and makes over a set amount this year, she does not file her own return. When she goes over that amount, which I don’t want to say since I have not looked at the tax rules this year yet, she can file her own return, but only you or she can claim an exemption for her, not both. You have that choice until she is 24 (again a precise decision), not a full time student, married, etc. From what you have posted, unless she is made a lot of money last year, she can just be on your return.

calmom · January 16, 2005, 2:32am

Clarification on kids filing their own returns:

If a kid CAN be claimed as a dependent on their parent’s return, they can NOT claim themselves as an exemption, whether or not the parent actually claims them. That is, the tax return asks the kid to check whether they CAN be claimed as a dependent on someone else’s return, not whether they actually have been. So if you are supporting a kid who is in school during 5 months or more of the school year, and the kid needs to file a return – the kid’s taxes are calculated under the rules applying to dependent’s.

I hope this makes sense - I just went through this last year when doing mine and my son’s returns. So basically it is not an either/or choice for the kid - their status is determined by the factual circumstances.

Anyway - don’t take my word for it. Check the IRS web site for specific rules.

xiggi · January 22, 2005, 1:44am

“While this may not pertain to us, doesn’t it seem that this penalizes someone who may have a “0” EFC who ended up with a generous scholarship because that same scholarhip may be taxable income.”

I have posted severa times about this issue. For some students, this create a real mess as a vicious circle is created: students may need to work to cover the payment of taxes, but the income will change the EFC and reduce the financial aid. Getting additional scholarships may not help for the same reason. It is obvious that few legislators understood the impact of the law they approved.

Speaking about understanding … the rules to establish dependency are NOT clear at all, especially for full-time students who receive generous scholarships. In my case, since the total of my scholarships exceed tuition, fees, books as well as exceeds the cost of room and board, I know that I have to file a tax return. The guidelines available at the IRS website are not clear at all. For instance, they mention that scholarship income CANNOT be counted as support in meeting the tests as it relates to the parents. However, the rules do not say if that applies to the student also. I have downloaded all the guidelines, and after reading them I am still none the wiser.

A quick read of the rules seems to create a situation where the IRS could use the obvious ambiguity to deny the exemptions to all parties. Another example of our bloated and inefficiant government at its best. No wonder taxpayers are fed up. Why is it so hard to write simple rules for simple facts. Would it really be hard to have a rule that states: “Parents of students attending college should make an election and indicate if the parents or the student claims the exemption, Only one exemption is allowed and the election is to be attached to each return.” Silly bureaucrats!

On the same subject, it would be nice to have some consistency between the FAFSA and the IRS forms.

itstoomuch · January 22, 2005, 2:18am

The IRS did not write the tax laws. Congress did, or rather the interest groups supplied the text and Congress passed the text. IRS only interprets the law and where the law is not clear then the IRS does the best it can to keep its constituents happy, who happens to be our congressmen not the taxpayers.

Current adminstration has made the tax system more complicated because of the tax reduction act. Check out IRS publication 17 , “Your Federal Income Tax, for Individuals” at your local library or post office.

Ditto for Department of Education and FAFSA.

xiggi · January 22, 2005, 2:47am

Istoomuch, thank you for taking the time to answer.

I am aware that the IRS does not write the laws.

It is, however, their entire and absolute responsibility to publish guidelines that SHOULD help taxpayers complete and file accurate tax returns. Did Congress write IRS Publication 17? Does Congress maintain the IRS website that refers to links that are no longer applicable.

As I said before, I downloaded and checked the various guidelines that are applicable, starting with the 300 pages Publication 17. Publication 17 -as the other IRS Pubs- falls short in providing clear guidance on the issue of using scholarship funds to pay for room and board.

I am afraid to have my own strong views on governmental agencies such as the IRS. I do not see how the current administration could be blamed for the inefficiency and ineptitude of the IRS.

bluebayou · January 22, 2005, 12:31pm

Xiggi:

actually, its a little more complex than the feds establishing clear rules, even if Congress writes a clear law. Oftentimes, the federal written laws are somewhat vague and open-ended to allow flexibility to the states to establish their own dependency rules. Even if a Congressperson proposes a clear law (or the IRS a clear rule), the states will respond back during comment period that that certain section of the federal proposal will not work at their state level. I would guess that if you looked that all 50 states, you’d find 50 different rules on dependency and taxability of certain scholarship monies.

Definitely Pub 17 is only for basic returns, with no complexity – likely 70-80% of all returns fall into this category. If we include the non-filers, then Pub 17 probably covers the questions of 85% of the populace. Remember also, that the general description on scholarships includes kids 17-21, grad students, and young adults who may return to school after a stint in the army or overseas mission. If Pub 17 was to cover all contingencies, it would be a lengthy tome, indeed.

Fortunately you have worked extremely hard and received ample financial support for college (CONGRATS, btw), but that puts you into that 20% who needs to refer to other IRS pubs, such 970. But, if you take a look at Pub 501, the wording, I think, is clear: This [Income] test does not apply if the person is your child and is either: 1) Under the age of 19 at the end of the year; 2)

The feds will not deny an exemption, either you or your parents can take it.

bluebayou · January 22, 2005, 12:36pm

sorry, I hit the wrong key stroke…

2) (continued): A student under age 24 at the end of the year."

Remember, scholarship money for tuition and books is not part considered income.

sybbie719 · January 22, 2005, 1:34pm

In the end there really is no such thing as a free lunch or in this case a Free Ride because the room, board, stipends, and work study money are taxable income to the student.

I guess it all balances out because the amount of money that the parents pay on the taxes are less than paying the cost of the education

xiggi · January 22, 2005, 3:41pm

Bluebayou, I appreciate your comments and the references to the 501 and 970.

Months ago, when I received notices on the various scholarships, I checked the applicability of taxes by reading 501 and 970, and 354 if I remember clearly. It was clear that I would have to pay some taxes. I posted this on CC because I knew that posters like Candi had full rides and probably were not counting on having to pay taxes on the portion that exceeds books, tuition, and fees applicable to all degree seeking candidates at the school.

I read the section that you quoted:
“But, if you take a look at Pub 501, the wording, I think, is clear: This [Income] test does not apply if the person is your child and is either: 1) Under the age of 19 at the end of the year; 2) A student under age 24 at the end of the year.”

That section is pretty clear, but it applies only to the fourth of five tests: the income test. Unless I am mistaken, the key test is the support test. Assuming for a second that in 2005, I will receive $11,000 of taxable scholarships and be at school for 8 months. For the support calculations, my parents CANNOT use the amount of scholarship, which I earned and is taxable. For that reason, it is doubtful that my parents spend more than 50% for my support during the year. In 2005, it seems pretty clear cut that I should claim the exemption. However, in 2004, the situation is a lot murkier. My taxable income is 50% of the figures of 2005 while I only lived at school for 4 months out of 12. The figures for support are a lot closer.

How could the IRS deny both exemptions?

<ol>
<li>I claim my exemption. The IRS denies it summarily because, in their sole discretion, I could have been claimed on my parents return. I lose the exemption and it cannot revert to my parents. </li>
<li>My parents claim the exemption, but the IRS uses the scholarship income to establish that I was not a dependent. They lose the exemption and it cannot revert to me. </li>
</ol>

While there appears to be no difference in total deductions -if the 3100 exemptions appears on one of the returns- some differences might arise when one of the taxpayers has little taxable income.

Please do not get me wrong. I am extremely thankful to even be in the position of paying taxes. The taxes represent a very small cost compared to the huge benefits I am receiving. Considering that the majority of posters on this board incur costs in the tens of thousand to send their children to school, I understand that some could see me as ungrateful, greedy, or cynical.

For what it is worth, I am not the only person who is facing this unclear situation. I think that many students who have received full scholarships did not count on having to pay taxes on about 30% of the aid. For some, this situation is especially hard if unaccounted expenses are incurred -like Candi medical costs. One issue is that you cannot work your way out of it as earned income reduces your award.

One of my pet projects is to obtain clear guidance, and establish a clear set of rules for the foundations that were so generous in funding part of my education. Right now, a discussion with other recipients indicates that lots of students are forced to ignore the IRS consequences unless the income is reported.

itstoomuch · January 22, 2005, 4:35pm

get tax program, fafsa, school aid form. Do what if situations.

whatever comes to the best favor for you and your parents-stick to it and see what happens. yes it is vague situation and made purposely so.

bluebayou · January 23, 2005, 8:38pm

Xiggi:

you have done your hw well, and are correct (as usual). And, I always appreciate your well thought-out posts. Keep 'em coming.

While not a tax guy, I was working on taxes this weekend and did some research, albeit limited. So, assuming their aren’t some arcane exceptions for students over flowing in scholarship money, the 50% support rule definitely comes into play on who takes the deduction for Xiggi, the kid: your parents, or you on your personal filing. When figuring the 50% support rule, don’t forget the residency rule which says you still live at home even if you have temporary housing at school. So a case could be made that your housing at home is also part of your support.

With regard to your 2 scenarios - your family will not lose out on the deduction. If you claim it, and it is subsequently denied, the Service is essentially saying that the deduction rightfully belongs on your parents’ return. If they have already filed their return without claiming you, they can amend their return (Form 1040X), and claim the dependent after the fact. No harm, no foul. But that is a highly unlikely scenario for reasons noted below.

In scenario two, then you amend your return, and you will receive a refund. For simple calculations, I did a quick and dirty tax return for Xiggi, the student, with $10k in taxable scholarships (and no other income). If your parents claim you on thier return, then your federal tax due would be $1,909. If you claim yourself, and your parents do not, then your federal taxes owed on the $10k is $1,591.

Now, since you are likely in a lower tax bracket than your parents (I’m making a great leap of faith here, and assuming that they make more than $10k), the Service has a much greater interest in seeing you claim yourself, than your parents claiming you bcos the federal treasury will be richer by the different in the tax rates. That is why scenario #1 is highly unlikely…if the Service does audit your return and challenge the dependency, it would cost the Treasury money because your parents would the be beneficiaries of a refund which is greater than the $318 you would owe ($1909-1591).

Another way to view this is from the tax auditor’s standpoint. If they are gonna take the time to request your presence in thier office for an audit, they need to come away with a monetary win for the Treasury; essentially, chasing your return for a few hundred bucks is very costly in terms of manpower, and just not worth it.

OK you Financial Aid Pros- I'm a little confused

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