<p>I know that I should be going to a tax adviser with this question, but am hoping that the knowledgeable posters here can help me since we file our own taxes.</p>
<p>My son just got notice that he owes taxes on a scholarship that he received last year. When he was awarded the money, we were told that he could use the money however he wanted with a tax consequence; however, if he used it toward his college expenses that it would not be a taxable event. I have been unsuccessful in reaching a live person at the IRS, but just wanted to make sure that we are correct in our assumption that he should not have to pay any taxes on this award. </p>
<p>If the scholarship total exceeds Qualified Education Expenses, normally tuition, fees, books, charges but not room and board, then the excess is taxable to HIM, not you. Say QEE are $25000 and scholarship is $25000. Nothing taxable unless you want to move some to the taxable portion (’ pretend’ you paid e $4000 for tuition so have him pay taxes on $4000 so that you can take the AOC on your taxes). If scholarship was $35k, he has $10k in taxable. If scholarship was $15k, nothing to report or pay.</p>
<p>For the most part, scholarship money is not considered income and is not, therefore, taxable.
But if your son had a $15,000 scholarship and used $10,000 for tuition, $1,000 for books, and $4,000 for room and board, then the $4,000 would be taxable income.</p>
<p>Sounds like this is for 2012, correct? Did your son receive a 1098T from the school in January 2013? If he had scholarships/grants in excess of billed qualified expenses he may or may not have received one. In any case, you need to check other records, bills/online accounts to see if scholarships/grants received in the tax year exceeded billed tuition and mandatory fees. You can add what was paid for required books and supplies if you still have receipts/records of payment.</p>
<p>The statement from the school should show you the amount of qualified education expenses were, and the amount of the scholarship. Any scholarship money in excess of the QEE is taxable. But you can deduct the cost of his books (if you have receipts) from that amount. </p>
<p>Thanks so much everyone. Yes, this is for 2012. Given your examples, this scholarship should not have been taxed. That was our understanding too so our son did not (mistakenly?) report it. It looks like we need to go through an IRS appeals process to straighten this out. Frustrated that I can’t get in touch with a person to know for sure…</p>
<p>Did your son receive a 1098T for 2012? If scholarships for spring 2013 were credited in December 2012 but QEE wasn’t billed until January, the 1098T can incorrectly make it look like there were taxable scholarships for 2012.</p>
<p>Unfortunately his tuition far exceeds his scholarship amount, so I don’t think it could have been confused as taxable. The mistake may have been that he did not submit the 1099 with his return so maybe they think that he was trying to evade?</p>
<p>Thanks for the link @annoyingdad; I really appreciate the help. </p>
<p>@annoyingdad, thanks for asking. He got a 1099 for the scholarship which he did not submit with his return.The IRS letter states: Notice of Deficiency - Increase in tax and notice of your right to challenge. It looks like we have to file a petition with the US Tax Court to appeal. Hoping that this will be painless.</p>
<p>Is the 1099 scholarship amount included in the 1098-T grants/scholarship amount? It may not be, if it was sent to you (the school would not have known about it and therefore did not include it on the 1098-T), In that case, be sure that you are including all grants and scholarships in your computations. </p>
<p>That sounds like an outside scholarship. 1099s normally aren’t sent to the IRS by the taxpayer either unless tax was withheld. But the organization did send it to the IRS. The IRS probably doesn’t know it was a scholarship that should be tax free with QEE. Does anything on the 1099 indicate it’s a scholarship? If the total of school and outside scholarships/grants is less than QEE you probably just need to show that the 1099 is from a scholarship and show the IRS how much QEE there was from bills/online account statements. </p>
<p>Did you the parents take an education credit for 2012? QEE for the AOC has to be reduced by the amount of tax-free scholarships/grants. Depending on the amounts involved, there could be some overlapping there too as you can’t get a double benefit from the same QEE amounts.</p>
<p>We had the scholarship sent directly to his school so there was no doubt that he was using it for college expenses. There is nothing on the 1099 to indicate that it is a scholarship. Oddly enough though, the 1099 amount does not square with the 1098. Have to figure out why that is. :(( </p>
<p>Don’t think that we took an education credit, but will look into it. Thanks for the heads up on that @annoyingdad.</p>
<p>This tax stuff is so confusing; can’t blame my kid for “messing up”. Thanks to all the generous posters helping confused people like me.</p>
<p>Looking back you said tuition far exceeds scholarships so I don’t think the education credit thing will be a factor. Since the scholarship was sent to the school directly it should show it credited on a bill/online account statement even if it’s not on the 1098T. Perhaps the school didn’t realize it was a scholarship payment. I don’t think your son “messed up” at all.</p>
<p>It would be a shame to have to pay someone to handle this for you and waste some of that scholarship money. It seems you have the facts on your side, it’s just what it will take to navigate the appeal process and how comfortable you would be doing it yourself.</p>
<p>My son has an outside scholarship that is sent directly to the school and always applied to his account as a scholarship and shows on the 1098T. He doesn’t get a 1099 though. Look at that bill and see how it was applied. You may want to call the billing office at the school and see what record they have of that payment. Perhaps they could give you a corrected bill and issue a corrected 1098T. Maybe the school thought the payment was from a 529 or Coverdell distribution.</p>
<p>Did he get the same scholarship in 2013 and a 2013 1099? If so, you probably want to get that straightened out now too.</p>
<p>If so I would write a letter of explanation, that the 1099 was for a scholarship and you had QEE in excess of that amount and saying the amount should be tax-free. Include a copy of the bill with the amount of the 1099 credited to the school account and showing how much QEE you had. I would first call the school and see if they will and how long it would take to get a corrected bill and/or 1098T so you could enclose those. Maybe you could get something from the organization saying it was for a scholarship and enclose a copy of that too. It may be handled that easily though you need to keep an eye on the petition deadline and don’t miss that if things haven’t been resolved in time.</p>
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