Counting scholarships and grants as income?

Paying for College
1

<p>I'm aware that, in general, the portion of scholarship and grant awards used to pay for tuition and other required expenses are not counted as income for tax purposes.</p>

<p>But something in IRS Pub. 970 made me wonder...

[quote]
Example 1. Joan paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. The terms of the scholarship state that it can be used to pay any of Joan's college expenses.</p>

<p>University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Joan does not report any portion of the scholarship as income on her tax return.</p>

<p>In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship).</p>

<p>Example 2. The facts are the same as in Example 1 , except that Joan reports her entire scholarship as income on her tax return. Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Joan is treated as having paid $3,000 in qualified education expenses.

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<p>If I read this right, then the fact that it is used as an example suggests that I can, if I so choose, claim the entire amount of scholarships and grants I received as income, and thus increase the amount of qualified education expenses thus allowing me to claim a greater Hope or Lifetime Learning credit (whichever one I choose).</p>

<p>I did not work last year, so even if I counted the full amount of my scholarships and grants as income I would still have zero taxable income after discounting my personal exemption and standard deduction.</p>

<p>Am I reading this right? Is it worth at least talking to a tax professional to make sure this is acceptable? Is this anything anyone has actually done?</p>

2

<p>Yes, this has been discussed frequently on this forum and people do it all the time. There are some times when it would not be possible. For instance if a scholarship specifically says it is for tuition, then you would have to count it as being used for tuition, not for unqualified expenses.</p>

<p>However, if you have no taxable income then there may be little or no benefit to doing it, depending on your individual circumstances. The lifetime learning credit is not a refundable credit, so if you have no taxes, you will get no credit. The Hope credit does not currently exist. It was replaced by the American Opportunity credit. 40% of the AOC is refundable, meaning you *may *be able to get part of the credit even if you have no tax liability.</p>

<p>If you are a dependent claimed on someone else’s taxes, only they can claim the credits. If you are not claimed on someone else’s taxes, then you can claim the credits (if you have a tax liability for the LLC). But if you are under 24, you can not claim the refundable part of the AOC unless you provide more than 50% of your own support from earned income (there are exceptions such as if both parents are deceased).</p>

3

<p>The vast majority of my grants are Pell grants, which do not stipulate that they be used for tuition only. I also have a state grant; I’ll have to look and see what kind of stipulations are attached to it.</p>

<p>I’m not a dependent, and I’m 26 years old, so there’s no problem from that angle. I’ll run the numbers and if it looks like it’ll work in my benefit, call an accountant and see about filing an amended return, for last year and prior years where it would be applicable.</p>

<p>Thank you for the information!</p>