making a grant taxable, fafsa implications

<p>Hi, I am trying to do some year end planning and finding this all fairly confusing so am hoping for some help.
In order to maximize the education tax credit on our tax return (the parents of a dependent student), we were planning on making some of our child's grant/scholarship money "taxable" by reporting it on her tax return. When adding the amount we want to make taxable to her return she would still be under $6,000 but she will still need to file a return because her summer job paid her as a 1099-Misc contractor so she has to pay in both her share of social security/medicare and employer share. But other than that, I'm pretty sure it won't generate any more income taxes to pay b/c she would still be under the approx. $6k of income, and if had been paid as an employee for her summer job wouldn't even have to file a return.
Once we've reported the appropriate portion of her grant/scholarship on her return, I believe we (the parents) can now take the full tax credit on our return which should save us some money overall.</p>

<p>However, b/c now we've added income to her tax return, and the Fafsa asks for the amount of income reported on the student's tax return, will this hurt her chances of aid next year? Or will it not make a difference since her income is still low (less than the standard deduction)? And I thought I read somewhere that on the fafsa there is a place to subtract out any scholarship had reported as taxable on your tax return...but where in the fafsa do you do that? Is it obvious once you are filling it out?</p>

<p>Thanks for any help, and I hope all that makes sense...its so complicated to explain!</p>

<p>Do look at the rules, but the way it works I thought was that income less than $6K does not count for any EFC for the student. Also, I believe any Scholarship and financial aid does get subtracted out if included.</p>

<p>Fafsa question 43d asks how much in taxable scholarships/grants was reported to the IRS by the student and included in AGI. The formula will subtract that amount from the student’s AGI when calculating the student contribution to EFC.</p>

<p>Dependent students do have a $6260 income protection allowance for 2014-2015. </p>

<p>As for the rest of your scenario, you seem to understand it very well and it is correct. The only thing that would complicate it is if there were any expenses paid with 529 or Coverdell funds.</p>

<p>Also, please be aware that if the amount of grant or scholarship money your daughter receives is more than the amount of tuition and qualified expenses, such as books, the excess amount IS taxable and must be reported on your daughter’s income tax return. This may not apply in your case.</p>

<p>Thanks everyone! Would the example below be correct?</p>

<p>Total of all grants, scholarships, etc: $5,000
Total of all qualified expenses (tuition, required tuition related fees, books, etc) $6,500
This leaves $1,500 in qualified expenses that could be taken as education tax credit. However, if scholarship income of $500 is reported on students tax return, then education tax credit goes to $2,000? But then to completely max out tax credit to $2,500, student would need to report, I think $2,500 on return (ie $500 to max out the dollar for dollar credit, and then $2,000 for the 25% available credit remaining)?
What if we receive the student’s 2nd semester bill in Dec 2013. Is there any benefit to paying it in 2013?</p>

<p>Annoyingdad, can you give a quick run down on how it would be if there were NO scholarships/grants, but instead if most qualified tuition/required fee expenses (except for example maybe books, etc) were covered by a prepaid state tuition plan? Is a tax credit still available for the parents if the student reports some of the prepaid tuition disbursement on student tax return…for example $4,000 of it? Asking b/c we will likely have this situation in the future.
We also have a small-ish amount in a Coverdall but haven’t really thought through how to best use it. Current listed benificary is a younger sib that will start college in couple years but has the prepaid tuition plan. Any idea of what the implications/pros/cons might be on using it for the older one getting some scholarships right now but no prepaid tution plan, vs. the younger one who will get no scholarship but has prepaid plan for tuition. My understanding is that Coverdalls can be used for room and board type expenses.
How does use of a Coverdall affect tax credit?</p>

<p>I know this is all a lot to ask, and a lot to read through so I greatly appreciated the help and time that is given on this website! Thank you.</p>