Yes. It’ll usually be reported on the 1098t even if it didn’t pass through to the student but was applied to the bill.
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News to me - thanks for letting me know! In that case, should the amount exceed the standard deduction, would my student (who is still a dependent claimed on my taxes) need to also file their own tax return to report that?
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Yes. There is no meaningful difference between a school giving a check to a student which the student then turns around and uses to pay for college expenses, and a school applying the funds directly to the student’s account. If a scholarship/grant is directly applied by the school to reduce non-qualified expenses (like room and board), it needs to be reported by the student as income. This is the law. See Chapter 1 of IRS Pub 970.
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Yes.
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Yes, probably. Here’s the relevant IRS pub:
And the comprehensive IRS pub for education credits, scholarships, etc is here:
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This is an important point.
Just an example of how this could play out:
Let’s assume a full ride to cover total COA.
Perhaps 20k of that is for room and board, etc., which would not be qualified and therefore is taxable. (Could be higher at some schools).
Student might earn 5-10k in the summer, conservatively.
Now, perhaps this family also qualifies for the AOTC. But to take it, they need to “push” an additional 2-4k of scholarship into taxable space so that the education credit can be applied to tuition.
So, now we are talking about 22-24k of unearned income plus another 5-10k earned income. This student might owe a surprising amount of tax at kiddie tax rates (parental rate) on what seems like a pretty modest summer job.
One way “out” of the kiddie tax is for the student to earn enough to provide half their support and therefore check the box that they can’t be claimed as a dependent. But unearned income can’t be used to provide support in that scenario.
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In these circumstances (where the parents’ tax rate is high, especially if it is 28%+) it is often better for the kid to contribute to a deductible IRA from their earned income to match their taxable income to the standard deduction. Then they can convert it to a Roth after they graduate/turn 24/provide half of their support and are paying at lower rates.
I would gift the student the $6K money for the IRA contribution instead of paying the tax. This is still viable to do for 2024 (up until the April 2025 tax filing deadline). It’s how we managed my D’s full ride scholarship with her summer job that tipped her over the standard deduction.
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The kiddie tax rules apply whether or not the child is a dependent.
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The kiddie tax doesn’t apply if the student is 19-23 and earns more than half their support (in which case they also can’t be claimed as a dependent).
This is known as the support test.
This is a different matter than simply choosing not to claim someone as a dependent, which might be what you’re thinking of (and which I’d agree is not an option that can be used to avoid kiddie tax).
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Actually, I believe they can be claimed as a dependent and not pay Kiddie tax. The support test for the kiddie tax says they have to “earn” more than half of their support, while the support test for dependency says they have to “provide” more than half of their support. Small wording changes, but if the student earns more than half and saves it, they don’t have to pay Kiddie tax, but can still be claimed as a dependent.
We considered a deductible IRA but I don’t remember why we decided not to do it. I’ll have to see if I made any notes. But a good idea for sure.
Ah- forgot about that language difference. It has been a few years. Thx
What little “hidden box” are you talking about?
When I get home Friday I’ll go through last years return.
It’s hidden to me bcuz it always takes me a long time to find it. It’s not hidden in that it’s in the questionnaire. Just hard to find.
I keep wanting to wien off TT for another but haven’t.
There’s a lot of really questionable information getting thrown around here. I would caution people to take any of it with a giant grain of salt. Part of the issue is it appears several posters are combining information regarding 529 withdrawals with merit scholarships. Merit scholarships are not relevant to a parent’s tax return at all - UNLESS they are also claiming the federal tax credits. The federal tax credits are limited if the merit scholarship exceeds qualified expenses which are much more limited than the qualified expenses for 529 withdrawals. So if your student’s merit scholarship is for full tuition and fees and books, you are NOT able to take the AOTC. But there is no parent tax on the student’s merit scholarship at all. Merit scholarships that exceed tuition and include room and board ARE TAXABLE for the STUDENT above the standard deduction - they do not have anything to do with the parent return.
Now Turbo Tax will try and tax 529 withdrawals to the parent (assuming they’re owners) until you indicate that they were used for qualified expenses which are much, much more generous than the above and include room and board, etc - essentially if you’re not withdrawing more than the universities stated COA, it’s not taxable. If you don’t indicate that the withdrawal is for qualified expenses it will be taxed and a 10% penalty added.
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This is what Turbo Tax says…
“If you receive scholarship funds that exceed your qualifying educational expenses, the amount above these necessary costs is subject to taxation. Likewise, if you receive a scholarship that you use to pay for room and board, books or supplies that aren’t required, these funds are generally subject to taxation.“
@thumper I missed the “hidden button” exception😀
[quote=“Darcy123, post:36, topic:3682777, full:true”] The federal tax credits are limited if the merit scholarship exceeds qualified expenses which are much more limited than the qualified expenses for 529 withdrawals. So if your student’s merit scholarship is for full tuition and fees and books, you are NOT able to take the AOTC.
[/quote]
I agree with your points re: who reports taxable scholarships. But I disagree with this section unless I’m misreading it.
Unless scholarships are specifically limited to tuition (which might be what you mean?) they are fungible wrt claiming tax credits. Students can choose to apply scholarship funds to nonqualified expenses in order to claim education tax credits. Most need and merit based scholarships aren’t specifically limited to tuition, but students should check on that.
My limited experience was they were named as tuition so not fungible but that may be a work around in some cases. we don’t qualify for the credits so not something I’ve researched extensively.
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Yes. I think you have to use the classification the school uses for the scholarship and how it is applied. Some schools give money specifically for room/board/transportation and those are not QEE, and taxable. That’s how I did my daughter’s as she had a scholarship that specifically was applied to her room and meal plan. None of her scholarship could be used for insurance as that was money the school paid out to a vendor and it wouldn’t use ‘school money’ for that. Her school grouped the ‘student fees’ into two fees, so the shuttle bus fee was included and thus became a QEE. If schools separate out transportation, sports, and a few others, then they are taxable if paid by a scholarship.
R&B is taxable even if the student still has QEE that isn’t covered because the scholarship is specifically listed as applying ONLY to a non-QEE. Is the IRS going to parse through the 1098-T and break the different fees out if the school didn’t? I don’t know. It took me HOURS every year to make sure the taxables were in one column and the QEEs in another. Her statement had 5 (just 5) charges on it (tuition, 2 student fees, room &/or board, and insurance). It took them 3 pages every semester to apply her 9-10 sources of payment. She paid the taxes on the room/meal plan because it was specifically listed as ‘Women’s athletic Grant-in-Aid’ and applied to a meal plan.
Her tax years were 2014 to 2018. For the early years I think the standard deduction was about $6000 and she had to pay $300-400 in taxes. When the standard deduction was raised to $12k, I don’t think she owed taxes.
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I agree most aren’t, but weren’t we ‘lucky’ that my daughter had several that were. She had a couple that could only be used for tuition (Bright futures in Florida allows the schools to decide how it can be used, and her school limited it to tuition, and she school limited part of her athletic scholarship to a meal plan). Also ‘lucky us’ there was plenty of tuition that needed to be paid beyond the restricted scholarships.
But you do have to check on any limits.
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