Hmmm… lots to think about. Thank you all for your help.
For FAFSA, this is correct.
Using the money to fund a 529 account may be problematic, so I would suggest talking with the school’s financial aid office about how they would view such an action, before doing this.
Yes; as already noted, any scholarship or grant amount actually received in 2018 that exceeds qualified education expenses (tuition, some fees, and required course materials) paid in 2018 is considered taxable income for the student.
We got hit hard with taxes on scholarships freshman year becuase of the local one time scholarships, the following year wasn’t so bad even though it was two semesters instead of one. I really wouldn’t have minded the taxes so much if it would have been taxed at DD tax rate and not ours thanks to the kiddie tax, now with the new tax laws using the estate tax rate, YIKES!
Use whatever scholarship money you can toward her tuition. Then use toward books and the one time purchase of a computer. If you have enough leftover scholarship money to cover tuition, then cover it (tuition and books are qualified educational expenses making them non taxable)
PELL is an entitlement, she won’t lose it. If there is extra PELL money refunded to her, I do not think she would be taxed on that @twoinanddone @BelknapPoint
All scholarships and grants that are used for non qualified education expenses are taxable income to the student.
Qualified education expenses are tuition, qualified fees, and books.
So the total of scholarships and grants (Pell Grant) she receives in 2018 should be added up, and then the tuition, fees and books expenses paid during that year subtracted from that to arrive at taxable scholarship/grant income.
Use a credit card to buy books, and make sure you document what the purchase was for at the time you make it. The kids like to buy a ton of random stuff on Amazon which could be clothing, paper towels, cookie mix, chemistry textbook.
You don’t have that luxury. You need to know when there is a $450 charge from the campus bookstore on Sept. 1 that it was for books, and a $220 charge on Sept. 2 from Amazon that it was for textbooks.
Keep the receipts and keep good records.
yep, Pell is taxable just like any other scholarship. Athletic money? Taxable. Elks? DAR? McDonald’s? All taxable if not used for tuition, fees, books.
Amazon will keep track of all purchases and it is quite easy to see the text books from the cookie cutters shaped like a pig. You can ask your child to keep track, but if they are like mine they won’t even when I explained it was THEIR money and it is no fun to pay taxes on stuff you don’t have to pay taxes on. I suggested a notebook to record important things. Nope. TG for Amazon. I also had them just look at the books on their shelves or look at the class requirements and figure out how much they spent on thing. The codes for some classes were $150! And yes, that’s why taxes are always being done on April 15.
I need to get DD#2 to add up her books and print out her spring semester bills NOW as she graduates tomorrow and I know at some point the school will take away her email, thus cutting off access to the financial aid and billing pages, and i know next April 15 she’ll be scrambling to add up the books and supplies. She took a tennis class, and I’m not sure if she needed to supply balls or not!
As others have mentioned At least $24,000 will be taxable the first year, unless some of the scholarships are paid out over both fall and spring semesters. But you might also benefit from tuition being billed in December, since the Pell Grant won’t be credited until January, and maybe if you’re lucky the $10,000 per year will also be paid $5,000 per semester. That could reduce the $24,000 a bit.
That said, the $12,000 standard deduction applies to EARNED income for dependents, otherwise it’s earned income +$350. Since we can consider the $350 negligible compared to $24,000, and you’ll be using the estate tax tables, you’re in for a shock at tax time. She will owe almost $4,000. As @twoinanddone states, it still beats the money coming out of your pocket. Just be prepared - it won’t be quite as bad the next 4 years!
But if the $5000 half if the scholarship is paid in 2019 it will just add to the 2019 dollars.
The Pell Grant should be disbursed in two parts…half for the fall term and half for the spring.
At the end…the amounts seem like they will even out over two years if the scholarship money is given in two payments the first year…but that second payment is going to then be added to whatever is given in 2019.
Agree…this poster should keep some of that money in an account for tax payment purposes.
@CTScoutmom through the magic and mysteries of the tax code, scholarships are earned income for the purpose of determining the standard deduction, but unearned income when actually paying the tax on it.
Basically, the student will get the $12000 standard deduction.
You gotta love the IRS.
So if the taxable money is $14K, but the standard deduction is $12K, then she will only need to pay tax on the difference of $2000?
@CTScoutmom through the magic and mysteries of the tax code, scholarships are earned income for the purpose of determining the standard deduction, but unearned income when actually paying the tax on it. You gotta love the IRS.
Basically, the student will get the $12000 standard deduction if the earned income and the scholarships are at least $12000.
I made the decision to keep all tuition and billing and the scholarship money for it, in the tax year, so the fall stuff went into one tax year and the spring stuff was carried over to the next year. This makes the 1098-T off, as the school billed the tuition in Dec but didn’t post the scholarships until Jan. Just keep it one way or the other. If you do it like the schools (usually) do, and put the spring tuition with the Dec tax year, you are going to have a nasty surprise that final spring when you have $20k or so in scholarship with NO tuition and fees to offset it. It’s also likely to be the year your child starts working and is independent for taxes. If he earns $30k for 6 months at a new job, plus $20k in scholarship income, that’s going to be a rough tax bill. Having the $20k in extra tuition would not have helped my daughter that first year as the amount she received in r&b that first semester was ‘covered’ by the standard deduction, but would be a killer if she had to include it in 2018 taxes.
This is all giving me PTSD as it took forever to do the taxes this year, and one kid’s aren’t done because one of her W2’s was wrong.