Hi there,
I’ve read A LOT about 529. I think I have a handle on it but would appreciate your wise and seasoned eyes on this:
• I will not be using AOTC or EITC. So, no need to worry about what I claim first, etc. I don’t qualify for these.
• DS has a few thousand in scholarship that they are applying to R&B. His tuition is covered by the school (faculty benefit).
• This leaves us with a bill from the university for the balance of the R&B each semester and program fees. This is about $10,000 per semester.
• I plan to use 529 funds for this entire $10k per semester. I’ll have the 529 fund manager send a check directly to the school. It will be a QHEE b/c it’s being direct billed by the school and DS is living on campus.
• I also plan to use 529 for required computer/software. I plan to disburse 529 funds to my son and let him buy the computer. Receipts will be kept.
• All 529 funds will be disbursed in the same calendar year in which the bill is paid. My spring bill is due January 7, 2019. I won’t request funds until January 2, 2019.
• I plan on continuing to contribute to the 529 throughout DS undergrad years for use in graduate school.
So … am I missing something here? Anything I’ve not accounted for or should be thinking about?
Thanks so much for any and all responses. I’m talking to YOU, Belknap!
If the fees are required fees, use scholarship money to pay those, and then use extra 529 funds to pay the extra R&B. It should be a wash to you either way, but if the scholarship funds pay for fees they won’t be taxable and neither will the 529 used for r&b.
Same with books. Use scholarship money to pay for books and then more 529 money to pay for the r&b to avoid tax on the scholarships.
Oh, if the scholarship is specifically for r&b there isn’t much you can do about that. Yeah, the tax isn’t much but every little bit helps if you can save something.
My daughter had a variety of scholarships and some could only be used for tuition, but the FA office was good about applying those first, and then putting everything else where it benefited my daughter the most.
Yes, his is designated specifically for R&B. So, reportable as taxable income to the tune of $3500 a year. Fine. Together with whatever his other income is from internships and he probably still isn’t close to the $12,000 standard deduction for 2018. I’m not super worried about any tax he’ll owe on the scholarship. It should be marginal. BUT. I’m still filled with questions about my particular situation:
• Faculty benefit includes full tuition waiver for DS. Is that taxable for undergrad? I see some info that says yes and some that says no. Section 117(d) of the IRS code seems to be referenced. Anyone know the answer?
• 1098-T. Will the reduction/waiver get reported on here or not at all?
• 1098-T: This form won’t show R&B or something like a computer that is needed. Meanwhile, the 1099Q will show that we withdrew $5,000 twice a year but will have no corresponding match on the 1098T. This HAS to be a common problem. My guess is we’ll need to send in documentation every year for this. Or perhaps we have our CPA proactively send it in with our reform. As in: “See here – $5,000 withdrawn and $5,000 paid to university for R&B which is considered a QHEE because student is more than half time and costs don’t exceed university’s advertised costs.”
This is my first time dealing with this. I’m all alone is figuring it out. My CPA is seriously useless. The tax software sounds very confusing. The benefits office at the university seems pretty uninformed as well. So …
The 1098-T will not show anything but how much was billed in QEE (tuition & fees mostly) and scholarships received through the school. I do not know if the tuition benefit will be on there as a scholarship, but I don’t think so. If it isn’t, they probably won’t show the tuition as billed either.
You can’t send in anything to the IRS proactively. Anything but tax forms and requested/required things like a W2 are shredded upon intake. I knew people who sent in phone book sized attachments to support credits they were taking, and they were all shredded, and then the IRS asked for all that again when they were investigating the credits.
The 1098-T rarely match how people pay tuition or apply scholarships. I’ve had 10 of them so far (2 kids) and not a single one has ever been right for how I do the taxes. I keep all billing and scholarships in the same tax year but the schools post the spring tuition in the prior tax year.
Yes, that is a common problem (the mismatch between the 1098-T and the 1099-Q), but I agree with twoinanddone that there’s no good reason to be proactive here. It’s an IRS computer, not a real live human, that may or may not pick up on a mismatch and send out a CP2000 notice a year or so after the return was filed. Again, it’s a relatively common occurrence, so don’t let it freak you out just be ready to substantiate your 529 qualified expenses.
Starting this tax year (2018), schools no longer have the option on the 1098-T of reporting either amounts billed by the school or payments received for qualified expenses; schools now must only report payments received for qualified expenses during the tax year. Hopefully this change will lead to 1098-T forms that more accurately reflect what really happened, but only time will tell.
Every scholarship has rules. You can only apply the scholarship according to the rules of that scholarship.
Every school allocates money according to their own accountancy needs, a need to get the money back after withdrawals, all subject to rule 1. (For example, see what happens when your kid gets parking tickets)
529s have rules about expenses that qualify and ones that do not. No double dipping is the big one. If you use the expense for a scholarship, it is t there for 529 etc.
It is for you, not the school, to decide how to allocate the money, subject to rule 1 and other rules. Keep receipts.
For D’s scholarships that were tuition only, the school applied those to tuition. They broke everything down on the billing statement. If a particular scholarship paid two or more fees or tuition, that scholarship was listed on several lines on the bill. I think there were 5 charges on D’s bills (tuition, 2 fees, meal plan, and insurance) but there were about 20 (I kid you not) credits as they applied those for tuition only first, then did the fees, then the rest of tuition, then the insurance which had to be paid from outside money. Parking tickets would have been last in line.
Other daughter? Billed amount (one number) - scholarships/grants/FA (one number)= amount owed/refunded. No breakdown.
If your son is your dependent (he most likely will be unless he earns (works) enough to pay at least half of his own support). As a dependent, his standard deduction will be limited to earned income (wages) plus $350. That leaves a but over $3000 of the scholarship that will be taxable. The good news is the amount is low enough it will all be taxed at 10%, even though it is subject to the “kiddie tax.”
My reading of the Internal Revenue Code section 117(d) is that a Qualified Tuition Reduction, as defined in that section, is not taxable if used for the benefit of your dependent child below the graduate level.
OP’s son will have $3,500 in taxable scholarships in a tax year when he has two semesters of college. A taxable scholarship is considered earned income for purposes of calculating the standard deduction for dependents. In 2018, a single dependent’s standard deduction is equal to the greater of $1,050 or earned income plus $350, up to the normal standard single deduction of $12,000. Unless OP’s son has more than $8,500 in other earned income (as defined for purposes of calculating the standard deduction for dependents) or more than $350 in unearned income, I don’t see how OP’s son will have any tax liability.
Except for the purposed of determining the standard deduction, scholarships are considered EARNED income, which gets you to earned income+scholarship+ $350, up to $12000 maximum standard deduction.
The scholarship used for room and board then turn magically into unearned income for paying taxes.
That would be news to me, and an important change to know about. Please cite the section of the new tax law that removes taxable scholarships from the “earned income” category when determining a standard deduction for a tax dependent.
Yes, a taxable scholarship is considered unearned income when figuring the kiddie tax on Form 8615, but if taxable income including a scholarship is totally wiped out by the deduction (where a taxable scholarship is treated as earned income), there is no requirement to file a tax return, and therefore the fact that a taxable scholarship is considered unearned income for the kiddie tax is completely irrelevant.
I don’t know how many kids will sneak in under the standard deduction under the new limits. My daughter paid taxes on the scholarships all her years, even when living cheaper off campus. She didn’t earn very much as earned income. Now the limit has gone up, but so have the room and board charges at most schools (and hopefully the scholarships to cover them?), and so have wages for most kids. At $6400, mine was way over but would have been closer at $12k to sliding in under the standard deduction.
I don’t think the OP will have anything to worry about with $3-4k in room and board scholarships, but many schools are charging $15k and in some places with minimum wage at $15/hr, the student could have $5k in summer earning too.
A nice problem to have, but a situation the student should be prepared for.
My son won’t have more than $8500 in earned income and there is no other unearned income. So, it sounds like he shouldn’t owe any tax on the scholarship. This is really so confusing and daunting to even think about, much less try to understand. I"m hopeful that paying for room and board from my 529 (directly to school) as well as larger expenses, like a computer (funds disbursed to my son, the beneficiary), is correct, qualified, etc. All I can do is keep very good receipts, I suppose.