So, hubby and I feel like we are heading down a rabbit hole and not sure where it ends. DS got great aid at college, which includes Room and Board. DS is 18, will he get a W2 from the school for that money? IF he is still a dependent on our taxes, do we claim that? How does this work? I am sure someone has answered this, but it is our first Rodeo and we are not sure about this, help!
Grants and scholarships are taxable to the extent that they exceed tuition, required fees, and necessary supplies and equipment. So if those three categories add up to $60k and your grant or scholarship is $70k, then $10k is taxable.
- Your student will receive IRS Form 1098T that displays the taxable amount. (Form W-2 reports EARNED income, like when you have a job.)
- Your student has to file his own tax return. He should have started doing that as soon as he started earning money if he’s ever had a job. (Your question presupposes that dependents never have to file a tax return, which obviously is not true.) You claim his as a dependent on your return AND he files his own return. On every 1040 there’s a question asking if the filer is claimed as a dependent on someone else’s return. He will check “yes.”
- Your son’s tax filing will also include whatever else he has earned from working a job, as well as other, unearned income such as interest.
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Up to $12550 (including any other earnings) will be tax free, as a dependent can use their standard deduction against taxable scholarships. Beyond that they will be liable for kiddie tax at the parents marginal rate.
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It is taxable to HIM, but he won’t get a W2, he’ll get a 1098T which will include the amounts he paid for tuition, fees, room and board, and how much money he got in scholarships. If the scholarship was specifically for r&b, he must include that in the taxable amount. If it is all mixed together, with a sum that can be used for tuition, room and board, fees, etc, he will included any amounts that exceed QEE (qualified educational expenses which are tuition, allowable fees, books).
One thing that is nice now is he’ll get his own personal exemption for taxes (was $12550 this year) so until his income and these scholarships exceed that, he may not owe any tax on it.
Free money is still a good thing. No one is in a 100% tax bracket, so it is always better to take the money and pay taxes on it.
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Yes, good point about the standard deduction. Unless ALL his income – including the grant for room and board and other income he may have – exceeds the standard deduction, which was $12,550 last year, it will not be taxable.
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Thank you everyone for responding! I now have a better understanding of this!
Thanks for asking, because I didn’t even think about this.
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So, work-study for fall and spring on campus is taxable or a tax exemption? Also is travel to and from college something we should enter as costs or a tax education credit? Such a learning curve!
Ok, Just so I am clear:
School costs Hypothetically $ 77 Minus $64 in scholarships and grants= $10.50 is our EFC plus Work-Study($2.50)
R &B is $ 15 - $12.50= $2.25 is taxed
QEE (Allowable expenses)
Books $ 3
Trans $ 3
Tuition $55
Fees $1.6
WS $2.5
Is everything but R & B, WS and EFC tax exempt? Also, since aid is from feds and school, do we use schools state tax rules or our own state?
$ 66 allowable expenses
$ 64 in Aid
I am minus $2, so no taxes on that amount?
Hope this makes sense
i don’t think transportation is a QEE … .
your books probably wont be as much as planned . . .
if computers are required (like at our school last year) they are QEEs . .
If you get $64K in aid then (if not specified what it’s for) the first $55K will go to tuition and the next $1.6K to fees. So your taxable scholarships will be at most $7.4K (likely a bit less after using money for books). You’ll pay tax on work study earnings too, but shouldn’t go over the $12.5K standard deduction.
Transportation (and health insurance which you don’t mention but should be considered too) are not QEE.
I probably should not wade in here as I have not dealt with this personally, so I am tagging @BelknapPoint for expert advice.
I thought that R&B amounts would be considered unearned income and therefore subject to Kiddie Tax guidelines–much lower standard deduction and taxed at parents’ marginal rate.
I would have expected work study W-2 earnings to be subject to the $12,500 std deduction and to be then taxed at the student’s individual rate.
I encountered Kiddie Tax for summer fellowship/scholarship in a year when my son also earned W-2 wages for working as a TA, so not the same situation as described here. But there was another summer when my son earned more than the $12,500 std deduction and he was taxed at his own rates–no involvement with Kiddie Tax.
They are unearned income for kiddie tax rates but are still offset against the standard deduction, unlike interest income where a much lower amount is exempt from tax. If scholarships plus earned income go over the standard deduction then they are taxed at kiddie tax rates from the first dollar of excess income.
As we found out this year it can then be advisable to set up a deductible IRA to the extent of any earned income over the standard deduction (eg if you have $12K scholarships and $2K earned income a deductible IRA contribution of $1450 gets rid of the tax liability, and you can convert that amount to a Roth later once out of the kiddie tax net). But that’s beyond the scope of OP’s question.
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Thanks for clarifying/correcting. Amazing how many different ways the Kiddie Tax comes into play.
I am guessing that fellowship awards are subject to the same much lower std deduction that interest income is? I found it massively frustrating that a summer fellowship was taxed at the parents’ marginal tax rates but was not considered income for the purpose of funding a Roth IRA. (Admittedly off-topic and not relevant to the OP.)
Thanks again!
This can be awkward. If your kid remains a resident of your home state as your dependent then they likely have to complete a state tax return there. But the state where the aid is given by the school will likely consider it reportable too and that’s certainly where tax on work-study is paid. So you might need both states.
We decided that D should become tax resident in her college’s state (register to vote, change drivers license etc) because it has a much higher standard deduction than CA. It meant we lost the ability to treat her as a dependent (and get the $500 deduction). But she avoided CA kiddie tax (which would have been more). And during the pandemic got the $600 and $1400 tax refunds.
If those are scholarships equivalent to those you get for regular college semesters, then the same rules should apply and you get the standard deduction (you can’t make IRA contributions from a regular scholarship either). But the tax rate once over the standard deduction is the kiddie tax rate even if the excess is coming from earned income.
S got a college scholarship to help pay for a summer in DC. But it was not differentiated from any other scholarships or specifically stated that it must be used for R&B so we allocated it to his college tuition instead (so it wasn’t taxable).
We never dealt with the kiddie tax rate. My daughter had a scholarship (several really) and she got her 1098-t, I added up her books, took her bill from the school and figured out how much she paid in QEE and how much she received and she, on her tax return, paid her federal taxes (she went to school in Florida so no state taxes). She had no 529 or other funds so no kiddie tax. The only thing on MY taxes was the AOTC credit (often she paid extra taxes for I’d get the AOTC. All the scholarship income was on daughter’s income. She did have one scholarship that paid for her meal plan (even when she lived off campus) so that always had to be included for taxes.
Do not worry about your EFC or the loans or the work study. EFC doesn’t matter and loans are not taxable (not income), and any work study is dealt with on a W2 (income for taxes, gets excluded on the FAFSA).
There may be fees that are not QEE, including insurance, transportation (including transportation around the campus), some fees for social things even if they are required. The school will not include those on the 1098 IF they are itemized on your bill. My daughter’s school did not itemize so all ~500 of the fees was QEE. Some schools really itemize and you can’t take a lot of the fees.
Have your son start a file for things he buys like books. EVERY year I was begging my kids to list the books, computer codes, required supplies (paint for a class, a yoga mat, other junk required). I’d keep everything he can on the list and you can always remove it as you as huddled in front of a computer on April 13th trying to figure it out. You might also get to take the AOTC or the LLC, but it really depends (R&B, travel, insurance also don’t count)
So it is likely his 1098-T will show $55k in tuition and fees, maybe $60k in scholarships. He would then include $5k in taxable scholarships. He’d add in the amount he actually spent on books and that amount would be added to income on his taxes ( it used to be on line 7, don’t know the line number now) he’d put in
- Income … (scholarship income $4500)…$20k (total income).
In that total income would be his W2 income from WS, a summer job, any other work.
If you want to read about it, it’s Publication 970 of the IRS.
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This has nothing to do with kiddie tax unless you declare more of the scholarship as taxable so you can withdraw 529 money to pay for more of the QEE.
Regardless, you pay at kiddie tax rates if you go over the standard deduction.
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This can get complicated, so start with the basics:
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For tax year 2021, the standard deduction for a single filer who can be claimed as a dependent on someone else’s return is the greater of $1,100 or earned income + $350, up to a maximum amount of $12,550.
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“Earned income” is defined differently by the IRS for figuring a standard deduction as explained above, and for figuring out what amount is subject to the kiddie tax. For figuring a standard deduction, “earned income” includes any taxable scholarship or fellowship grant (this is good for the student). For figuring out if the kiddie tax comes into play, a taxable scholarship or fellowship grant is considered to be unearned income (this is not good for the student, as the kiddie tax taxes a child’s unearned income more than $2,200 at the parent’s marginal rate).
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Calculate the standard deduction first to see if there is anything to tax, be it earned income and/or unearned income.
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Money earned from a work-study job is taxable. It’s a job. What makes it “work-study” is the source of the funds to pay the student, which, for a work-study job, is partially the federal government.
The benefit of a work-study job is that the income is excluded in the calculation of financial aid in subsequent years. Your son does not have to worry that if he earns $3,000 from work-study, that that income would reduce his financial aid award in future years.
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