<p>Question from Tax Dummy… (that would be me)…</p>
<p>So on my son’s 1098T it lists the “amounts billed for qualified tuition and related expenses” (box 2). In box 5 it lists the scholarships and grants - in our case this amount is higher than box 2.</p>
<p>Now out of the first figure in box 2, do I subtract the amount of that sum that I paid to the college in order to find the amount of qualified expenses I should subtract from the amount in Box 5 in order to find out how much of the scholarship money my son will own taxes on? (I am claiming that amount I paid towards my AO credit.)</p>
<p>I mean, I don’t want to subtract the entire amount of box 2 because that is the billed amount (of which I paid a portion)… if I did it would make the amount that ends up as taxable to him look smaller than it actually is, right? I mean, smaller would be nice, but it’s not exactly accurate, yes? no?</p>
<p>Two different issues going on (probably more). One is what portion of the scholarship money is taxable. The other is whether you or your son can claim an educational tax credit.</p>
<p>My recollection is that any scholarship income above tuition and related expenses is taxable income. So box 5 less box 2 equals taxable income, generally on son’t return. I also believe that for this purpose, you can’t include books as qualified expenses unless they were required to be purchased from the school.</p>
<p>On the tax credit issue-- You can add books (regardless of where purchased) to the amount in box 2 for purposes of qualified expense. From that total, subtract the amount in box 5. If that amount is $4K or higher, you might get the max tax credit of $2500 (if you otherwise qualify). If between 0 and 4K, you might qualify for a smaller credit. If the difference is 0 or less, you won’t qualify for an educational credit (but might still qualify for an educational deduction).</p>
<p>That’s my non-tax professional take on it, from memory anyway.</p>
<p>Well, on the first issue, if I simply subtract box 2 from box 5 then that gives my son actually a lower taxable amount than if I do it the way I was first thinking I should. So if you’re right, that’s good news.</p>
<p>On the second point… w-a-y too confusing for me! I just followed the instructions on TurboTax (answered the “interview” questions) and the amount I can apply toward the AO credit worked out to be exactly what I paid directly (our share of tuition & fees, plus books)… so that one, although they get you to it in a convoluted way, seemed to make sense to me.</p>
<p>the only way to make this explainable is to use numbers, so I’ll make them up.</p>
<p>If box 2 is $14,000 which is tuition and fees, and box 5 is $20,000 which is scholarships and grants then I see two ways to do this but can’t find in the IRS literature if the beneficial way is allowed.</p>
<p>If you simply take the 20 -14 you get $6K of taxable income because that’s what went to room and board and other things. If room and board and other things comes to $8,000 then the total expenses would be $22,000 and you personally paid $2K of it, the rest covered by scholarships. </p>
<p>So there would be two ways to handle it on the return. The first is to simply tax the $6K and be done. That would go on the students return. The second would be to decide that the scholarships paid for room and board first, and then tuition. So if the $20K covered the room and board of $8K, then there was $12 left for scholarships and you paid $2K. In that case, the $8K would be taxable, but you would receive a tax credit for the $2K. I believe that would make a bigger refund, but as I said, I can’t see if that is allowed. Maybe Swimcatsmom knows.</p>
<p>But what you can’t do is a hybrid of that explanation and tax the lower amount while taking a credit for the higher amount.</p>
<p>Reading this conversation is scaring me. My kid starts college this fall. We are going to be pulling money out of various accounts to pay, plus getting scholarship money from several sources. My husband is confident that TurboTax will guide him where he needs to go.</p>
<p>Is my husband correct? Or do we need to take our taxes to a real, live expert? I would like to take advantage of whatever tax breaks are available. Correctly.</p>
<p>3bm - I spent hours poring over IRS970 and looking at tax books in the book store and searching on the internet trying to figure out the answer to that question. I came to the conclusion that you could do that. I did end up doing it last year (electing to make part of the scholarship taxable income in order to take the credit). But I am not a tax expert so this is just my interpretation of the rules.</p>
<p>I am not a tax expert but found a couple of discussions about it online. This one is from a CPA journal, very lengthy but makes interesting reading</p>
Bingo! If there is a scholarship that requires it go to tuition only then apply that first. After that apply all the grants and other scholarships toward room and board. Apply the loans and cash toward tuition and books.</p>
<p>I agree that sometimes it can be done and sometimes it can’t. For example, a grad student receiving a stipend would have his tuition covered and the rest given to him. I don’t believe you can justify claiming as income the part that covered the tuition and then getting a credit on it. That would give the student a large refund because part of the credit is refundable.</p>
<p>But in cases where the scholarship could have covered anything, then you could allocate as you wish.</p>
<p>Thank you, 3bm103. I was inclined to tax my son the higher amount and receive a credit for the portion I paid. It works out better for me that way, and I’m the one that actually shells out the money to pay his taxes on his the taxable part of his scholarship anyway… I mean, it’s on his tax return, not mine, but I write the check!</p>
<p>Skyhook, I think TurboTax is just terrible in this particular detail. The “interview” questions are vague and the explantions thin and almost useless. Last year I used Tax Cut and it all seemed much better explained… but whether it all worked out right, I don’t know! This seems like an area where a lot of non-tax savvy people are probably making a lot of errors, but I don’t think it’s their fault. It’s like, to be in compliance you have to do a lot of homework, ask a lot of confusing questions so that you can find a way to make sure to pay enough taxes.</p>
My daughter has a full tuition scholarship. So that part is a no brainer - it is for tuition. But it covers tuition not fees (which at her school are almost as high as the tuition). So her other scholarship which is not designated for any particular cost, I treat as paying partly for room and board, making it taxable, and the fees are paid with loan money, making them eligible for the credit. </p>
<p>Of course to make life even more complicated 3 of the required fees are not allowable fees per the IRS so are not reported in the 1098 by the school, even though they are mandatory fees. SO I have to reconcile all that as well.</p>
<p>I agree turbotax does not do this well. You really have to read up on the rules and keep track of what money payed for what and how best to treat it all taxwise. (I do an Excel spreadsheet).</p>
<p>Skyhook, I have worked for a CPA for a number of years. He fixes more returns done by H & R Block, also the chain at Wal Mart & people do it themselves with “Turbo Tax” or one of those software packages that you buy at Staples! </p>
<p>I always tell people to go see a tax professional, one who is highly recommended by a friend, neighbor etc. Having to file an amended return is a big pain! See a tax professional, face to face, get it done right, then you copy it and send it to the colleges!</p>
<p>taxactonline lets you MANUALLY put your education credits into the place you want it to be, either a credit or a tuition and fees deduction. I highly recommend this software (don’t work for them, just a customer)</p>
<p>You can do that on TurboTax, too. The issue for the non-savvy, like myself, is understanding the complexity of the rules and all the convoluted tax-speak. (TurboTax isn’t helpful at all in that respect when it comes to education credits/deductions/etc.)</p>
<p>If you know exactly what you’re doing and the result you expect, then any tax program will do. Although some are easier to get the desired results than others. But if you aren’t sure, or don’t know, none of them are very helpful and none of them will get the exact right answer if you don’t guide them.</p>
<p>For those choosing to put a portion of a scholarship toward R & B (instead of tuition), how does that affect your child’s FA? I guess that portion of the scholarship gets counted as income on the child’s tax return - added to their summer/school year wages and interest, dividends, etc. This would also be reported on FAFSA, correct? Does that then increase the child’s EFC and then cause next year’s scholarship to decrease?</p>
<p>No. Taxable scholarships and grants that are included in the students AGI are reported in question 44 on FAFSA (along with WS earnings). These items are deducted from the student’s AGI in the EFC formula so do not impact the EFC.</p>