Confused about taxable scholarships

Paying for College
1

I took a look at a thread on this and am deeply confused.

DS is getting need based aid only. It covers roughly two-thirds of COA.

He is currently a freshman and has a few thousand dollars of summer earnings. He had some withholding and was going to file on his own to get that back.

  1. Is his need based aid considered a taxable scholarship?
  2. Does that depend in any way on whether he files a tax return?
2
  1. yes, aid exceeding allowable expenses is taxable, yes. Allowable expenses are tuition, fees, books, supplies and mandatory expenses. Room and board and other personal is taxable.:
  2. no
3

COA isn’t relevant. The amount of qualified education expenses is relevant. QEE is tuition, mandatory fees and required books and supplies only. Room and board and other components of COA aren’t QEE for this purpose. So do his grants exceed QEE and by how much?

If there is enough grants in excess of QEE he would have to file a return whether he wants to or not.

4

So you’re saying we have to see to what extent the need based aid covers different categories of costs. If it covers anything beyond QEE, that part is taxable.

Have I got that right?

5

I defined it in my post, I see we cross-posted.

6

OK, I checked and the need based grant plus a small merit scholarship from high school is less than the cost of tuition.

In my understanding, this means there is no taxable scholarship in this situation.

Do I have that right?

7

Yes.

8

Yes. Just check to make sure the amounts you are looking at are for 2014. Did your son get a form 1098T from the school? It may not have been mailed, he may have received an email on how to download it from the school. Only grant and scholarship money credited to his account or that he received otherwise in 2014 would count for 2014.

And look into the QEE you or he paid, even if with loan funds, for the AOTC.

9

Sounds right, unless you want to make enough QEE taxable, if any, so that $4000 of QEE was paid with non tax-advantaged dollars in order to get up to $2500 AOTC on parent’s return. See IRS Publication 970.

10

Thank you so much!

Now I am unclear about how this fits with the AOTC.

11

See IRS Publication 970.

12

Read chapter 2 of IRS Pub 970. You can take a tax credit for expenses you or he, even with loan funds, paid for QEE. You have to reduce QEE by the amount of his tax-free grants though.

http://www.irs.ustreas.gov/pub/irs-pdf/p970.pdf

Read this IRS link about making more QEE available to take the AOTC:

http://www.irs.gov/pub/irs-utl/Pell%20AOTC%204%20pager.pdf