I am hoping someone here has experience with this type of situation and can help me. My child received a somewhat substantial award that can be used for any purpose at all, but it is not taxable if used for college. Child already has some small scholarships for their first year that cover their expected contribution as determined by the college. The check is made out to the student. I am wondering if it is possible to use the money towards college costs that are due as part of the parent’s contribution and still be tax deductible. My child would report the actual scholarships to the college and forward the scholarship checks to the financial aid office. Child would then deposit award check in their checking account and then write a check in the same amount to the college to pay for tuition. Parents would pay for remainder of costs, child would be claimed as a dependent, and child would file a tax return. I assume they would then report the income from the award on next year’s aid application. New at this so no idea is kiddie tax comes into play since this would be unearned income for my child. Any input would be appreciated.
It doesn’t matter where the scholarships come from. Any scholarship/grant money over and above qualified educational expenses (generally tuition and mandatory fees, books & supplies) is taxable. I think the kiddie tax comes into play if the taxable scholarships total $2200 or something like that (threshhold changes each year).
If the student still qualifies as a dependent, the parent(s) can claim the AOTC for qualifiied educational expenses paid with funds that taxes were paid on even if somebody else actually paid or wrote the check. It can actually be advantageous to pay taxes on more scholarships than you have to, to maximize the AOTC which may be much higher than the amount of extra taxes paid by the student.
https://www.treasury.gov/connect/blog/Documents/Pell%20AOTC%204%20pager.pdf
Read IRS Pub 970.
You cannot double dip. If you use the scholarship to pay tuition/fee/books (therefore taxfree) then you cannot use that amount for any other tax benefit such as the AOTC. However, you can elect to declare part of the scholarship as taxable (to your dependent) to allow you to use that part of tuition/fees for the AOTC as described above.
Thanks for the info and link. Definitely claiming AOTC and leaving $4000 of tuition money that is paid for by parents and not any other source of aid. Due to the cost of the college, the total of scholarships, aid, and this particular award will likely not exceed the student’s qualified educational expenses.