HELP: scholarships and taxes

Paying for College
1

<p>I have read through the forums here, and I am more than confused. But some of you here seem to know what you are doing!</p>

<p>I have 2 DDs in college, different scholarships, paying for expenses and tuition with ex husband. In 3 years have not found a tax preparer that knew how to do this well. One of them actually missed all the college credits (it was corrected the next, thankfully) </p>

<p>Details:
* Divorced, decree doesn't mention college (only states health insurance till age 24)
* Head of household, both DD's my dependents (I assume, mine is official address, they spend roughly 1/2 and 1/2 spare time with both parents)
* Both DDs are older than 18
DD1: Dad pays for college1 -only QEE minus books, no fees, room, food or personal expenses. I pay for books, non QEE, flights home, and full medical expenses not covered by insurance including 2 surgeries.
Scholarships: total $1500/semester), college scholarship: spring '11 ($710) fall '11 ($6290) One scholarship (1000/year) does not specify use.
DD2: Full scholarship, dad and I pay zero. Scholarship goes directly to college2, on top of QEE it also covers room and board for $8503.75/year (all reported in 1st semester) and personal stipend $1200/semester. Other scholarships (all go directly to college, used towards QEE): total $ 1750/semester</p>

<p>Neither DD has earned more than $500 in 2011. </p>

<p>PLEASE, can anyone shed some light on how is best to file, who reports what, room and board split in 1/2? American Opp Tax/Hope/LifeTime? Are all those scholarships reported in one bunch, are some considered income? If so, reported by who and how?</p>

2

<p>Any taxable scholarships are taxable to the student not the parent. So for DD2 add up all QEE (make sure to include books) and total all scholarships/free money. The difference between these 2 amounts will be taxable. Your DD2 will file her taxes adding this taxable amount to Line 7 (if using 1040 EZ). You have to note how much of the total income is due to scholarships and write that in to the left of the income on line 7. For example “5,000 SCH 5,5000” (you put all this on Line 7 if she had 500 in income and 5000 in scholarships).</p>

<p>For ANY tax credits for the parents - Only the parent who claims the student as a dependent can claim the tuition tax credits. If you could claim your money for DD1 were for QEE then you could claim the AOC (worth $2,500). Why is the contribution between you and EX spelled out the way you have it? He cannot take any tax credits for QEE unless he claims your DD1 as a dependent. Is this in writing or just an understanding to compute who pays how much?</p>

3

<p>Thanks for clarifying this. As I am 100% right brain, I still need help. I’ll try to answer some of your Q’s:</p>

<p>1st thing I noticed is that indeed it wasn’t any better to pay preparers than to do it myself. They all told me students didn’t have to file if income was less than $5,800.
They also considered the scholarships as a bulk money amount, not differentiating allocation or who manages them (D1 has an unrestricted sch. that goes to her, saving it for grad studies) Taxact didn’t specify details either.</p>

<p>“Any taxable scholarships are taxable to the student not the parent” But if student has zero income, how is she expected to pay for scholarship? </p>

<p>I am concerned now that D1 never filed in 3 years. Her biggest income was an internship in 2010, $4000. I was assured that my payment of her expenses and board was NOT a gift, and NOT income. The unrestricted scholarship is for $1500/year. Her college statement doesn’t specify where they put any money received, how do I differentiate QEE?
I know for sure food, room and board are not payed w/ them. So doesn’t that make scholarships=100%QEE?</p>

<p>Now D2. All scholarships go to the college, they manage them but didn’t send a fall 2011 itemized statement, and full ride scholarship itself is so new that the ppl in charge have no idea. When I talked w/ them yesterday, the answer was, “What?” as in, “why would you even want to know that?”. The most they could do was differentiate what they set aside for room/board ($8503/yr, all reported in fall) and personal expenses stipend ($1200/semester) D2 is also right-brain, so no records of books/school expenses, etc.</p>

<p>But you are saying both MUST file, even when income is close to zero, asides from scholarships? Or is it an option? If so, what is the advantage? And I MUST file differentiating, when I think that all income is due to scholarships? I am lost…</p>

<p>About dad’s part. All is in fact in the air; he is now paying QEE, but could stop any day, as he did with the medical part. The reason I described it that way is that there is a small print that relates to +18 child in college, where it says that, all other things equal including time spent with parents, the higher-payer parent can claim. Still, I think that there is a form that has to be signed by the other parent first. Anyway, I was just putting it out there in case it was pertinent. In the past, it felt wrong to claim the whole benefit when I only paid for a portion of college costs (but if I am entitled to I will) Also, it wouldn’t align with my income, with equals D1 college bills :-P</p>

<p>So, still in need of direction, as you can see. Big Q now is, do DD’s have to file too?</p>

4

<p>OP,</p>

<p>In general, this year your dependent daughters have to file if their earned (from working) income above $5800 or unearned $950. In addition, they might want to file if they expect tax refund even if they don’t have to.</p>

5

<p>@ lerkin</p>

<p>Pardon my ignorance, but does it mean that I will be claiming AOC or other, and they will also be claiming scholarships?
I thought that if I claimed them as dependents, they could not file taxes. Possibly another foggy misconception…</p>

<p>File for unearned money? That is scholarships, I assume. Should they report total minus $950?
Do they, can they go back to 2009-11 and do that? And you say they may get a refund? If filing is possible, and beneficial, of course they will want to do that, 2 kids in college is heavy on a teacher salary…</p>

6

<p>OP,</p>

<p>Dependents have to file if their income exceeds threshold above the amounts I posted earlier.</p>

<p>Your daughters only need to report taxable portions of scholarships - those that do not cover qualified expenses and instead cover things like dorm, etc. They have to report the entire amount that goes towards non-qualified expenses (do not subtract $950 from the amounts to be reported - that amount was the test threshold).</p>

<p>It is up to you to decide what expense the scholarship covers (unless it has specific designation). From your first post it appears that your ex-husband should claim your D1 and at least for D1 he might claim educational credit (subject to income limits). You have to play around with the numbers, so that your ex maximizes educational credit vs. potential taxes your daughter might have to pay.</p>

<p>It does not look like he pays QEE for D2 (unless I misunderstood), so he will not be able to claim educational credit for her and if you are paying her health insurance and he pays nothing, you can claim D2. Also, if you are friendly with your ex, you might want to ask him split the credit (he will still get benefit from claiming D1).</p>

<p>I suggest your daughters do not go back and file for previous years because most likely any benefit they might get from filing, will probably be negated by the penalty for failure to file taxes. If they don’t file, IRS will not go after them, because they are a small fish in a pond (from my experience). </p>

<p>Can you invest into turbo tax for this year? It is going to be so much easier for you to figure stuff out without consulting CPA.</p>

7

<p>@lerkin</p>

<p>Thanks for taking the time. It is spring break here, and my only time to deal with this, so I really appreciate it!!!</p>

<p>Isn’t turbotax similar to Taxact? I’ve done it that way every year, and then took it to preparers for the last few years, when college came into the picture, because I read the IRS forms until my eyes went blind,and simply could not make sense.</p>

<p>No, dad only communicates with D’s, and it is a flaky relationship, type A personality. Not a chance at sharing, negotiating, doing what makes sense. He will take all he can, even with his income nearing $300,000.</p>

8

<p>Houstonmom1,</p>

<p>if his income indeed 300K, he cannot claim educational credit. Also, even though there are IRS rules who claims dependent, people only follow them if there is an argument about who should do that. In practice, I’ve seen people taking turns or the one parent with more need will always claim the dependent. So my advice is that if your ex never raised a question about dependent claim, then go ahead and claim your two daughters. If you contribute anything towards your D1 non health-care expenses (like give her money), then you might be able designate that money as going towards her QEE (once again, without running the numbers I don’t know if educational credit will negate potential tax your daughter will have to pay on her taxable portion of scholarship - if any). </p>

<p>I am not familiar with Taxact, so I cannot give you advice here. I use professional software, and the reason why I suggested turbo tax was because that is the name that came to my mind.</p>