Income tax implications of scholarships and grants?

Paying for College
1

<p>I know that scholarships and grants for tuition and required fees are not taxable and that scholarships and grants for room and board are. Is there anything else I should be aware of with possible tax implications?</p>

2

<p>Read this thread:</p>

<p><a href=“http://talk.collegeconfidential.com/financial-aid-scholarships/1442996-reporting-financial-aid-fafsa.html[/url]”>http://talk.collegeconfidential.com/financial-aid-scholarships/1442996-reporting-financial-aid-fafsa.html&lt;/a&gt;&lt;/p&gt;

<p>There are a bunch of posts in it about how to figure the taxable part of scholarships/grants.</p>

<p>Also, investigate how your state treats scholarships/grants for tax purposes.</p>

3

<p>I’m curious as to how a student receiving generous FA that covers all or most room and board – and who works in the summer and at a work study job to cover their EFC – is also supposed to come up with enough money to pay income taxes.</p>

4

<p>Perhaps take out the Stafford Loan to cover taxes. Better to only have pay taxes on $10k of room/board then to pay $10k for room and board!</p>

5

<p>– and who works in the summer and at a work study job to cover their EFC – is also supposed to come up with enough money to pay</p>

<p>that would be difficult. I think that’s why the parents are supposed to pay for most/all of the EFC. If the parents can’t pay the EFC, then maybe they can at least help with the taxes.</p>

<p>That said, federal work study doesn’t go towards EFC…it goes towards “need”.</p>

<p>Better to only have pay taxes on $10k of room/board then to pay $10k for room and board!</p>

<p>True!</p>

6

<p>Agreed that the student is better off paying the taxes on the room and board rather than the actual room and board, but I wonder how many students (who may have never filed an income tax return) have the forethought to realize this situation may apply to them…</p>

7

<p>True. </p>

<p>However, the majority of students aren’t getting grants that exceed tuition, fees, books. Most aren’t even getting grants to cover tuition.</p>

8

<p>It is unlikely that the value of room and board would increase the student’s taxable income to the point where they had to pay much in taxes.</p>

9

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<p>The problem comes when doing taxes and the 1098-T from the school can make it look like the student received more scholarship/fin aid money than the college billed in expenses. Most typically this occurs when the student is billed for the spring term in December, but the school awards spring-term scholarship money in January. There are a number of threads discussing this problem and strategies for dealing with it.</p>

10

<p>One other thing to throw into the mix:
interplay between scholarships, 529 funds, and tax credits. Scholarship money can’t be used to qualify for tax credits, so if scholarship funds are unrestricted, it may be better to use them toward room & board (and “pay” taxes on them) in favor of using loans or earned income toward tuition which qualifies for the education credits.</p>

<p>The low income student shouldn’t end up in too bad of a position. While taxes will be due on that income, the student can earn up to $5950 before any taxes are due (more if independent for tax purposes), and will then only pay a low tax rate (10 initially), while the parent (or student if independent) will get back 1000% of the first $2000 in qualified expenses and 25% of the next $2000.</p>

<p>So in the case of the student with an almost full ride, but $5000 in work study, they use $4000 toward tuition, the remaining $1000 toward room and board, and pay taxes on the grants toward room and board (assuming there are no loans). If that is $16,000 in room & board (the figure for one of the schools where D has been accepted) the tax due will be under $2000 (actually, with $15,000 of taxable scholarship and $5000 wages it comes out to $1676) - less than the $2500 coming back for the education credits. If you instead use only $2000 toward tuition (and reduce taxable scholarships to $13,000) the tax drops to $1376. The latter option would be adviseable if the parents don’t have tax liability, and would only get the 40% refundable portion of the credit ($1000). In that case, the net cost would be $376, far better than paying $16,000 for room and board!</p>

<p>If there are loans in the aid package, again $4000 (or $2000) goes toward tuition, the remainder toward room and board, with scholarships being used for all but $4000 (or $2000) of the qualified tuition and fees. </p>

<p>There may or may not be state tax implication, which I have not included.</p>