Are scholarships taxable???

Paying for College
1

Hi everyone:
This forum has been a lifesaver for me. Great advice on here and answers to questions I can’t find anywhere else. So here’s my latest question:

My son just finished his first semester. He has a small scholarship of $1700 which they are allowing us to apply to room and board because he already has a tuition waiver (faculty benefit). I didn’t realize this, but I just read that scholarships used for anything other than tuition or books/supplies (i.e., R&B) ARE, in fact, taxable. Even as an undergrad. First, is this true? Can anyone confirm? Second, does anyone know if this scholarship would be reported on my son’s tax return or mine? He has some reportable earnings from a summer job so he will be filing a return. I am hoping the scholarship gets reported on his return because then the tax bill on this “income” won’t be as high since his tax bracket is probably 10% and ours is much higher. And finally, whether the scholarship is reported on my return or his, my guess is we should pay estimated taxes on it to avoid a penalty rather than waiting for end of the year to determine what we owe plus potential penalty. Anyone know?

While I have your attention on that, I also wanted to confirm that the 1099-Q for 529 withdrawals would also be reported on his return. I withdrew twice from his 529. Once for supplies, and the funds were disbursed to HIM. Second to pay the fall 2018 bill (room, board, fees) and that went directly to the school. I appreciate any answers and insight to these questions.

2

We had this exact situation. Tuition covered by employee benefit, additional outside scholarship. Outside scholarship is taxable to the extent that is was used for no qualified expenses. In our case, the majority of that outside scholarship was taxable (amount used to buy books was not). The scholarship “income” is reported on the student return. Under the previous tax code, the amount taxable may have been taxed at the kiddie tax rate. Fill out form 8615 and follow the instructions. I’m really not sure what the new rate will be for taxable scholarships in 2018. We’ll find out, I guess.

We have yet to pay estimated taxes. It’s been fine. Be aware, though, that certain summer opportunities (government, REUs) are also considered sholarships and ouch! On top of what’s already taxable? It’s a big bill.

Room/board is a qualified expense for 529 withdrawal. The statement will come to your s in his name since none of the money came to you.

3

Ordinarylives, thank you! That’s funny that we had the same situation. The scholarship he received is for tuition but since we had the waiver, they said they can apply it to R&B. I didn’t have any option to use it otherwise. It shows up as a credit on the semester’s bill.

My son worked this year at a retail place and interned somewhere in the somewhere (not a govt job). I think his earnings for 2018 are about 7-8k. There is no unearned income to report. So I THINK, if I am understanding this, that since his earnings plus his $1700 scholarship do not exceed the standard deduction for a single filer ($12k for 2018), he should not have any tax liability. Right?.

4

Okay – now I’m confused. I just read that the taxable portion of a scholarship for a dependent student is reported on the parents return. I assume my son, who is 19 and a full-time student, is considered my dependent since he “lives” off of the money we are paying from our 529 for him to be in a dorm room and eats off the meal plan the 529 fund pays for. Or should he not be claimed as a dependent? Argh. At any rate, check out this link:

https://www.cnbc.com/2018/04/23/heres-why-that-scholarship-might-not-be-free-after-all.html

This is the part from the link that I am confused by, which says clearly this is considered unearned income but which in other posts I have read is considered EARNED income for the purposes of calculating a standard deduction:

Who’s ultimately responsible for reporting the tax load? For dependent students, Mom and Dad would report the scholarships on their return.

In this case, a taxable scholarship is considered “unearned income,” subjecting it to the kiddie tax if the child is under 19 or is a full-time student under age 24, Steffen said.

Under the old tax code, this would’ve meant that unearned income exceeding $2,100 is subject to the parents’ rates, and families would use Form 8615 to calculate the liability.

Under the new tax law, however, the “unearned income” will instead be subject to the trust income tax rates — meaning that taxable income exceeding $12,500 will be taxed at the top rate of 37 percent.

If I am reading this correctly, under the 2018 tax laws, the $1700 scholarship we got in 2018-- which will be $3400 in 2019 – would be taxed as unearned income, reported on my return, and taxed at 37% if the unearned income is over $12,500. It’s not and we don’t have any other unearned income that, together with the scholarship, would exceed $12,500. So does that mean we wouldn’t owe any tax on this taxable scholarship? Am I understanding this correctly? @Belknap, where are you?

H-E-L-P…

5

I think you are misunderstanding something you see in that link.

@BelknapPoint can you clarify things like the kiddie tax for this poster!

6

It is reported on your son’s return. Your post #2 is correct. It was unearned income taxes at the parent’s rate but now will be at the trust rates. It is likely it will all fall under the standard deduction ($12000).

There is no penalty for underwithholding as long as he withheld at least 90% of the taxes paid the prior year, so basically the first year is a freebee. I think you’ll (he’ll) be fine this year. If you do end up paying taxes, next year have him withhold more from his job.

Although we had a few scholarships that could only be used for tuition and the school applied the funds that way, when the 1098-T is issued and when I added up all the money for the taxes, I just put all the stuff in a list with the QEE (tuition, fees, books) and subtracted that from the total and paid the taxes on the rest. In your case I don’t think it will matter that the school applied the $1700 to r&b and you paid for book y. You can only use tax benefited funds once. Use the 529 money for the room and board and the scholarship money for the books.

But hey, it’s all good. It’s money you didn’t have to pay OOP so if you are taxed on it it is still better than paying 100% for the room and board.

7

-A scholarship for the student is income for the student, and is not reported on a parent tax return.

-if the scholarship is used for room and board, which is not a qualified expense for scholarships, it is taxable.

-In determining the standard deduction for a dependent, a taxable scholarship is deemed to be earned income, which is a good thing. With the much higher standard deduction this year, OP’s son’s total earned income may not exceed his standard deduction.

-For purposes of the kiddie tax, a taxable scholarship is considered to be unearned income. Carefully read the instructions for IRS Form 8615. Kiddie tax rates for tax year 2018 use the estates and trusts rate table, not the parent’s marginal tax rate, as was the case in prior tax years.

-529 distributions are never reported on a tax form, unless some or all of a distribution was used for an expense that is not a 529 qualified expense.

8

Thanks so much for the clarification. I can’t think of an other forum where there are such articulate and knowledgeable folks … and, might I add, charitable in terms of sharing this knowledge. Thank you very much. But, of course, I have a few more questions that hopefully you can clarify since I am in the process of rounding up forms and such for the tax year. (In addition to full-time employment, I do consulting on the side so that’s a whole other issue but part of why I am always trying to ensure I’m cross every T [as in Tax] and dotting every I [as in I don’t want to pay more more than I have to, ha ha]).

So, to thumpers point: Perhaps I misunderstood something, but that article clearly states that taxable scholarships are reported on the parents’ return:

“Who’s ultimately responsible for reporting the tax load? For dependent students, Mom and Dad would report the scholarships on their return.”

Is this point in the article incorrect, then?

To twoinanddone: You say it goes on son’s return. Again, this conflicts with the article. That’s why I was confused. But you are also right that I’d rather pay tax on a scholarship because I’m still ahead that way.

To BelknapPoint: I think you said you were not a CPA, but I bet you’d make a killing if you decided to become one. Thank you for confirming the scholarship goes on the STUDENT’s return. The point you make about the taxable scholarship being earned income makes sense … HOWEVER, how does that comport with your next point about it being considered unearned income? How can this scholarship be both earned income and unearned income? Is it actually reported both ways and then you pay the higher of the two?

9

We’ll see how it all shakes out. Mine graduated in April. She got a pretty good job with a decent salary, so there’s no way, given what she makes and what make, that I could claim her. Her AGI for the part of the year she worked is likely to be about 2/3 of mine. Anyway, she’ll be figuring out the taxable part of her scholarships, which should be under 2100 since it was just one semester, for someone who is not a dependent.

FWIW, we’re dealing with the iRS, so it is entirely possible for something to be both earned and u earned income. As an organization, it defies logic (like the time my insurance agent told me what a sentence meant in a policy. No, baby, let me diagram it for you). Anyway, @BelknapPoint knows his stuff. It can be both depending on the situation/form.

10

@WantWhatsBest

The best way to tag someone on this forum is to put the @ before their username. I will tag @BelknapPoint and @twoinanddone so they can respond to you.

But yes…the article is wrong. The scholarship goes on the STUDENT tax return…but the tax rate is not the student tax rate, but rather the estate/trust rate.

11

And… I just found this link which explains very clearly the kiddie tax as it applies to taxable scholarships.

https://www.capstonewealthpartners.com/the-kiddie-tax-changes-to-the-tax-code-in-2018/

So which is it? Using the example of a $5,000 taxable scholarship and the student also earning $5,000 in earned income through a summer job:

  1. Taxable scholarship is reported on student return as earned income for the purposes of the standard deduction, in which case $5,000 for the scholarship + $5,000 in wages = $10,000. Standard deduction for a single filer in 2018 is $12,000. Tax liability is zero, because 10k is less than 12k.
  2. The $5,000 taxable scholarship is reported on the student return as UNearned income. It is therefore subject to the kiddie tax. According to this article, that $5,000 scholarship would= $346 in taxes. No taxes on the $5,000 of earned income since it is less than the standard deduction. Total tax owed= $346.

What am I missing?

12

You’re not missing anything. That’s the way it works. Earned for the purpose of the student standard deduction (but the amount of the scholarship will be indicated with an “SCH” on the line by earned income. Then, because it’s a taxable scholarship, you do form 8615 and pay what it tells you to.

13

Ah, the IRS is an institution with magical powers. A scholarship can be unearned income for purposes of paying the tax but considered earned income for calculating the standard deduction! Magic.

The standard deduction is the amount of income plus $350, or a max of $12k (2018). For the purpose of calculating the amount of the standard deduction ONLY, ‘income’ is both unearned and earned. Honestly, it benefits us (our kids) to include the unearned income with earned income for the standard deduction.

The when you do the taxes, you put earned and unearned income on line 7, with the amount of the scholarship off to the side in () (like Schol ($1500)…$7,500). When you get to the standard deduction line, you fill in the amount you’ve calculated, either the max of $12000 or income(earned + unearned) +$350.

14

This line from the first article quote above is wrong.

15

Ah, okay. I think the fog is lifting now. Thank you all for your answers. So for my particular situation:

  1. Son's taxable scholarship is reported on HIS return
  2. It's noted on line 7 of the 1040, with SCH next to it
  3. His earned income for the year plus his "earned/unearned income" scholarship do not exceed the $12,000 standard deduction
  4. We will also fill out form 8615 for him, the kiddie tax. Those rules for 2018 apply the trusts/estates tax rate. According to other articles I found, the first $2100 of unearned income is exempt. That means for 2018, his $1700 scholarship wouldn't have any tax due.
  5. Next year, he WILL have tax on his scholarship because it will exceed $2100. And that will be figured regardless of what he might owe or not owe on his earned income and regardless of whether the standard deduction gives him zero tax liability on his earned income.

I think. Well, this at least points me in a more solid direction. This is all so crazy. How does the average tax filer even begin to comprehend any of this? You need a law degree and a CPA before you can chip away at this.

And don’t even get me started on the 529 stuff. I’m still totally in a fog there. All I can do is keep receipts, use funds for qualified expenses, and withdraw funds in the same tax year as they are used.

16

Yes (if he’s even required to file a tax return).

Their are significant tax form changes for 2018, so make sure you read and follow the instructions.

In that case, there is likely no obligation for him to file a tax return (of course, if he had tax withheld, he will probably want to file a return to get that back).

He won’t need to file a form 8615 if his standard deduction covers all of his earned and unearned income.

Not quite. Generally, if the kiddie tax comes into play, the first $1,050 of unearned income (using the kiddie tax definition) is exempt. The next $1,050 of unearned income is taxed at the child’s rate. Anything over that is taxed using the trusts and estates rates.

No. If his standard deduction as your tax dependent covers all of his earned income plus unearned income (using the standard deduction definitions for those terms), he will not be required to file a tax return.

The 529 stuff is easy compared to the kiddie tax. There’s nothing to report as long as all 529 distributions are used for qualified expenses and distributions are taken in the same tax year as the expenses that they are used for are paid.

17

The tax software (used TaxAct, Turbo Tax, and I think one other over the years) always produced the 8615 even if tax wasn’t owed by the student. I don’t know if it was required, but it was produced.

18

Well hurrah! Thank you and thank you. Yes, he had a small amount of federal tax withheld so has to file a return to get it back. As well as filing state and local returns – a whole other beast. Good lord.

19

TurboTax Freedom Edition filed federal and state tax for free for my kids the last few years.

20

Since you mentioned local tax, are you in PA? Don’t forget to file for a Local Services Tax refund for him if he earned less than $12,000 at his job.