Let say for example the school’s tuition and book together is about $14,000 and one receives lets say $16,500 in state need and pell grant and $3,000 from a scholarship. Because there is $5,500 leftover after paying for the tuition the student wants to use it to pay for housing.
How does the taxing work in this scenario? I am pretty confused because of this and any information would be greatly appreciated.
- I heard that the $5,500 would be taxable because it is not used on qualified school expenses such as tuition and books regardless of it being financial aid or scholarship. Is this correct?
- Additionally does the Personal Expenses/Transportation shown on the COA Budget count as qualified school expenses or no?
- Also how does all of this affect fafsa? Can anyone answer this for me?
Would the scenario change a lot if the scholarship was $7,000 (meaning the total not used on tuition/books but rather housing would be $9,500)? In regards to both fafsa and filing taxes in general
Any advice would be greatly appreciated! Thanks for the help.
The funds in excess of tuition, fees, books, supplies and mandatory equipment is taxable, but the student has a standard deduction of 6,300, so until you make more than that you won’t pay any tax in this situation.
The details are explained on this forum over and over, so you should be able to find posts in a search. Also here
http://www.finaid.org/scholarships/taxability.phtml
@BrownParent ahh so like for the 9500 case you would be pay tax for the 3,200 while for the 5,500 case you would not really pay anything since it is under the standard deduction of 6,300. Correct?
It would depend if you have other income, other taxable items (interest, benefits). Some students have $2-3k in summer earnings so with $4000 in taxable scholarships some might start to fall into the taxable side. My daughter didn’t have any earnings last year, so could use all of her $6200 (2014 personal exemption) for taxable scholarship set off. Next year, she will have a much bigger tax burden as she’ll have 2 semesters of scholarships to deal with, plus some earnings.
I can’t complain. It is still better to pay taxes on the scholarships than to not have them at all.
@twoinanddone oh ok that makes a lot of sense now. Does any of this affect fafsa for the next year or no? and what kind of tax forms would I fill out? That is about all I am wondering now after searching up as much as I could.
The details are in IRS Pub 970, chapter 1.
http://www.irs.gov/pub/irs-pdf/p970.pdf
If you do have to file and do actually report an amount of taxable scholarships/grants on your return, you would put that amount for fafsa question 44d.
https://fafsa.ed.gov/fotw1516/help/faadef37a.htm
The amount you enter for 44d is subtracted from the AGI you enter on fafsa so you aren’t penalized for the taxable scholarships by the fafsa formula.
Also, if you have taxable scholarship/grant amounts, you may have to file form 8615 with your return. I’ll presume you will be a dependent on your parent’s return and the amount may be taxed at your parent’s tax rate. You should talk to your parent’s about these tax implications. If form 8615 applies to you, you would have to file a 1040A, otherwise you can file a 1040EZ.
http://www.irs.gov/pub/irs-pdf/i8615.pdf
Also, taxable scholarships/grants go by the tax year, not the school year. So if your school bills in January for spring and credits scholarships/grants in January for spring, those amounts will be for tax year 2016, not 2015. For 2015 you many only have 1 semester of excess scholarships/grants if you will be an entering freshman this fall.
@annoyingdad wow that was a ton of help thanks. It makes me wonder though. If there is left over scholarship/financial aid money in one’s bank account would that affect the following year’s fafsa?
Money in your accounts from scholarships or grants should not be included. Keep good records…
I don’t mean to hijack the thread, but I am really curious about something. If a student from a very low income family gets full financial or merit aid that covers room, board, travel, and personal expenses plus they have summer income they could potentially have a huge tax bill between federal and state tax, and they have no withholding to cover it. Assuming they have no savings and their parents can’t help them, then what?
I have a feeling most students in that situation are not filing.
Planner, it’s a lot cheaper to file those taxes than pay the college bills…or,the penalties for not filing your taxes…which can really add up quickly.
Well if the excess scholarship was about $20,000 (r+b, travel, expenses) for example and the student had $2,000 summer earnings, then about $16,000 would be taxable and would at 10% tax rate be about $1,600 in tax. Add to that state tax. In that case I would try to save the summer earnings to pay the tax due. The student should have all expenses covered at school with the scholarship.
I don’t know the provisions of the kiddie tax…but isn’t the excess taxed at the parent rate?
Yes, but planner’s scenario included the parents having low income.
So I figured the tax rate would not exceed 10%.
He had asked what if the low income student had tax due from the scholarship and parents couldn’t pay for it.